Nelson Low Level Equilibrium Trap

Richard R. Nelson, an American professor of economics at Columbia University presented his theory for underdeveloped countries  based on ‘Malthus View’;

“The population tends to rise when per capita income rises above minimum subsistence wage.”

According to Nelson underdeveloped countries have always stable equilibrium per capita income equal to subsistence level and this low per capita income entrapped such economies in vicious cycle presented below.

An increase in per capita income works on population growth rate as;

  • In beginning increase in per capita income leads to increase population.
  • Then it decrease population.

To show how underdeveloped countries (UDC’s) are trapped by low equilibrium level of income Nelson presents three sets of relations.

  • Y = f ( K , L , Tech )
  • New investment is equal to capital created out of savings (in form of addition to machine tools and addition of new land).
  • Whenever the per capita income reaches a level above the subsistence level any further increase in it will have a negligible effect on death rates. Moreover changes in death rate are due to changes in per capita income.

Reasons Behind the trap

  • High Correlation1 between per capita income and population growth rate
  • Scarcity of  non cultivable area of land.
  • Inefficient techniques of production.
  • Social and economic inertia2.
  • Little propensity to direct addition per capita income to increase investment.

Graphical Demonstration of theory

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 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).
  • Panel (3) shows curves of population growth rate (dP/p) and per capita income growth (dY/Y) by taking dP/p and d Y/Y along y-axis and per capita income along x-axis. Both curves(dP/p) and d Y/Y are intersecting at point “y” where d Y/Y = dP/p. Before point “y” dP/p < d Y/Y which push an economy to point “y” where zero saving is equal to minimum subsistence level of per capita income. Above “y” point dP/p > d Y/Y pushing an economy again to point “y”. This process goes on and on entrapping an economy of UDC’s in an equilibrium trap of low-level of per capita income.

Getaway from the trap

According to Nelson following steps can avoid trap;

  • Favorable socio-economic and political environment.
  • Reduction in family size.
  • Change in income distribution.
  • Proportion of public investment must be changed.
  • Loans should be taken from foreign countries to support investment and capital.
  • Improved techniques of production.

Criticism

  • Population growth is assumed an increasing function of per capita income growth rate in the start then as its decreasing function but in actuality population growth takes place due to an augment in public health facilities.

References:

  • R.R. Nelson (1956) “A Theory of the Low Level Equilibrium Trap”, American Economic Review, Vol. 46, p.894-908.
  • “Economic Development” by M.P.Todaro
  • “Economic Development” by Herrick and Kindleberger

1 A tendency of per capita income and population growth rate to vary together.
2 An example of Social inertia in Pakistan is in the form of choice of corrupted political parties again and again regardless of benefits.

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14 responses to this post.

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  5. Posted by rahat on April 11, 2010 at 5:16 am

    i want to clear a point i.e. in part 2 of diagram on y-axis there should be per capita investment rather than per capita income. per capita income is on x-axis.plz coment if i m wrong.thanx

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  11. Posted by shafaq on January 19, 2013 at 3:33 pm

    can i have a brief explanation of the criticism on this model?

  12. Posted by shafaq on January 19, 2013 at 3:36 pm

    i want a brief explanation on criticism of nelson’s low level equi trap

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