Question

What does convergence mean in the neoclassical growth model?

Answer 1

There has been a convergence of ideas in between endogenous & exogenous models with respect to the convergence of hypothesis, Human capital is considered one of the most important in convergence process. In general, Technology in long run growth process & human capital is the main determinants for long run growth. Aggregating human capital investment in e.g., Education & Training leads to sustainable & developing the ability of individuals.Investment in human capital grow at different rates. Human capital is the growth rate of output which depend on the rate of innovation as well as the on the level of human capital. Neo classical model is based on economy which grows by saving & investment in capital stocks, Thus it depend on stocks . Economic growth can not continue without technological advancement.

In Neo Classical Growth Model which outlines a steady economic growth rate results from a Combination of Labour, Capital & Technology. There different concepts of convergence, All models implies there is a positive correlation between human capital & growth. Neoclassical models that focus on human capital or other models that predict the convergence of hypothesis, identify trade policies is the main determinant of technology.

Convergence occurs only if the countries share the same steady state, Economies will converge if they have the same steady state , they only differ in terms of their initial capital stock but having same savings rate, same rate of capital depreciation & the same population growth rate ; the neo classical growth theory predicts convergence among economies. The exogenous growth model predicts the convergence .

The Neo Classical Growth Model provides positive predictions for convergence; that predicts convergence among economies if they have the same characteristics; only differ in terms of their initial level of GDP or income level.