{"id":39100,"date":"2017-06-26T14:33:38","date_gmt":"2017-06-26T18:33:38","guid":{"rendered":"http:\/\/quotulatiousness.ca\/blog\/?p=39100"},"modified":"2017-07-14T10:04:53","modified_gmt":"2017-07-14T14:04:53","slug":"human-capital-conditional-convergence","status":"publish","type":"post","link":"https:\/\/quotulatiousness.ca\/blog\/2017\/06\/26\/human-capital-conditional-convergence\/","title":{"rendered":"Human Capital &#038; Conditional Convergence"},"content":{"rendered":"<p align=\"center\"><iframe loading=\"lazy\" width=\"853\" height=\"480\" src=\"https:\/\/www.youtube.com\/embed\/SVWX4Xjl4Os?list=PL-uRhZ_p-BM52EbMG1NR1ZfG9tEvcxE4u\" frameborder=\"0\" allowfullscreen><\/iframe><\/p>\n<blockquote><p><strong>Published on 26 Apr 2016<\/strong><\/p>\n<p>In our previous macroeconomics video, we said that the accumulation of physical capital only provides a temporary boost to economic growth. Does the same apply to human capital?<\/p>\n<p>To answer that, consider this: what happens to all new graduates, in the end?<\/p>\n<p>For a while, they\u2019re productive members of the economy. Then age takes its toll, retirement rolls around, and eventually, the old workforce is replaced with a new infusion of people. But then, the cycle restarts. You get a new workforce, everyone\u2019s productive for a while, and then they too retire.<\/p>\n<p>Does this ring a bell?<\/p>\n<p>It should, because this is similar to the depreciation faced by physical capital.<\/p>\n<p>Similarly, are there diminishing returns to education? It likely wouldn\u2019t pay off for everyone to have a PhD, or for everyone to master Einstein\u2019s great theories.<\/p>\n<p>That means the logic of diminishing returns, and the idea of a steady state, also applies to human capital.<\/p>\n<p>So, now we can revise our earlier statement.<\/p>\n<p>Now we can say that the accumulation of any kind of capital, only provides a temporary boost in economic growth. This is because all kinds of capital rust. So, one way or another, we\u2019ll reach a point where new investments can only offset depreciation.<\/p>\n<p>It\u2019s the steady state, all over again.<\/p>\n<p>However, what does the journey to steady state look like?<\/p>\n<p>The Solow model predicts that poor countries should eventually catch up to rich countries, especially since they\u2019re growing from a lower base. And given their quicker accumulation of capital, poorer nations should also grow faster, than their more developed neighbors.<\/p>\n<p>And eventually, every country should reach similar steady states.<\/p>\n<p>In other words, we would see growth tracks that all eventually converge.<\/p>\n<p>So, why isn\u2019t this always the case? Why, in some cases, are we seeing \u201cDivergence, Big time,\u201d as coined by economist Lant Pritchett?<\/p>\n<p>The answer to these questions, lies in the institutions of different countries and the incentives they create.<\/p>\n<p>Assuming that a certain set of countries do have similar institutions, that\u2019s where we see the convergence predicted by the Solow model. We see that poorer countries do grow faster than their richer counterparts. And conditional on having similar institutions, eventually, even poorer countries will reach a similar steady state of output as more developed nations. We call this phenomenon conditional convergence.<\/p>\n<p>You can think of it as a national game of catch-up, with catch-up only happening if institutions don\u2019t differ.<\/p>\n<p>What happens though, once all this catching up is done?<\/p>\n<p>Let\u2019s not forget that there\u2019s still another variable in the Solow model. This is variable A: ideas &mdash; the subject of our next video.<\/p>\n<p>There, we\u2019ll show you how ideas can keep a country moving along the cutting edge of growth.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Published on 26 Apr 2016 In our previous macroeconomics video, we said that the accumulation of physical capital only provides a temporary boost to economic growth. Does the same apply to human capital? To answer that, consider this: what happens to all new graduates, in the end? For a while, they\u2019re productive members of the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":35193,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[25],"tags":[1093,1143],"class_list":["post-39100","post","type-post","status-publish","format-standard","hentry","category-economics","tag-macroeconomics","tag-principlesofeconomics"],"jetpack_featured_media_url":"https:\/\/quotulatiousness.ca\/blog\/wp-content\/uploads\/2016\/06\/favicon.png","jetpack_shortlink":"https:\/\/wp.me\/p2hpV6-aaE","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/39100","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/comments?post=39100"}],"version-history":[{"count":1,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/39100\/revisions"}],"predecessor-version":[{"id":39101,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/posts\/39100\/revisions\/39101"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/media\/35193"}],"wp:attachment":[{"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/media?parent=39100"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/categories?post=39100"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quotulatiousness.ca\/blog\/wp-json\/wp\/v2\/tags?post=39100"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}