Question

What is the difference between unconditional and conditional convergence in economics , and why is this difference important?

Answer 1

In economics, Conditional convergence implies that a country or a region is converging to its own steady state while unconditional convergence implies that all countries or regions are converging to a common steady state potential level of income.

Conditional convergence is the tendency that the poorer countries grow faster than the richer countries and converge to similar levels of incomes whereas on the other hand, by unconditional convergence we mean that the low developed countries will ultimately catch up with the industrially advanced countries so that in the long run the standards of living throughout the world become more or less the same.

According to conditional convergence, a country's income per worker converges to a country- specific long-run level as determined by the structural characteristics of that country whereas unconditional convergence means that lower initial GDP will lead to a higher average growth rate.

The implication of conditional convergence is that structural characteristics and not initial national income determine the long run level of GDP per worker. Thus foreign aid should focus on structure and there is no need for an income transfer from richer to poor nations while the implication of unconditional convergence is that poverty will ultimately disappear "by itself". It does not explain why some nations have had zero growth for many decades.

The difference between conditional and unconditional convergence is important because in the world of finance and trading, it is quite essential to study the impact of new investment in physical and human capital.