Convergence

Question 1

Absolute Convergence

Answer 1

Neoclassical absolute convergence hypothesis states that less developed countries will achieve equal living standards overtime.

It assumes that every country has access to the same technology.

This leads to countries having the same growth rates but not the same per capita income.

Question 2

Conditional Convergence

Answer 2

Convergence in living standards will only occur for countries with the same savings rates, population growth rates and production function.

Under this hypothesis, the growth rates will be higher for less developed countries until they catch up.

Under neoclassical model, once a developing country’s standard of living converges with that of developed countries, the growth rate will then stabilize to the same steady state growth rate as that of developed countries.

Question 3

Club Convergence

Answer 3

under this hypothesis, countries may be part of a ‘club’ i.e. countries with similar institutional features such as financial markets, health and educational services etc.

Under this method, poorer countries that are part of the club will grow rapidly to catch up with their richer peers.

Countries can ‘join’ the club by making appropriate institutional changes.

Question 4

Non-Convergence Trap

Answer 4

Those countries that are not part of the club or don’t implement necessary institutional reforms never achieve the higher standard of living.