Page 235 - DECO501_ECONOMICS_OF_GROWTH_AND_DEVELPOMENT_ENGLISH

Unit 23: Low - Level Equilibrium Trap

(iii) There is .................... investment in the economy when savings are negative implying a Notes
situation where consumption is greater than income.
(iv) Nelson’s thesis advocates that if the country is to break the shackles of low level equilibrium
trap, into rate of growth of total income must be higher than .................... per year.
(v) According to Nelson New investment is equal to .................... created out of saving.

23.2 Graphical Demonstration of Theory

Population 1
Growth b c
Rate dp p
/

a
(Y/ )
p
0

Per capita 2
income dK/ p

x=S=0
V
(Y/ )
p
0

dP/P> Y/Y
d
increase in 3
Population / Income
/
dp p
dY/Y
y
(Y/p)
0 V
dP/P= dY/Y
dP/P< dY/Y
Fig 2
Explanation
• In panel (1) of figure the curve dp/p shows population growth rate by taking per capita income
(Y/P) along x-axis and population growth rate along y-axis. Curve dP/p in intersects x-axis at
point “a” indicating minimum subsistence per capita income where dP/p = Y/P. Population is
decreasing left to point “a” whilst it is increasing right to the same point shown by arrows.
When per capita income is above subsistence level at first Population growth rate attains
maximum point “b” then becomes stationary and lastly starts decelerating after point “c”.
• Panel (2) of figure shows the curve of per capita rate of investment out of saving (dK/p) relating
per capita of investment with varying levels of per capita income. At point “x” savings are zero.
Left to the point, saving is negative while it is increasing along investment growth curve (dK/p).

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