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Nelson’s Low Level Equilibrium Trap in Economics

Updated on March 2, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Introduction

Nelson’s low-level equilibrium trap is a model in development economics. Professor R.P Nelson developed it. The theory tell us about the relationship among per capita income, population growth, saving, capital formation etc. the theory is based on the population theory developed by Malthus, who was one the great figures in classical economics.

Professor R.P Nelson published an article titled “A Theory of the Low Level Equilibrium Trap” in 1956. He analysis the relationship between population growth and income growth in the different stages of development.

What is low level equilibrium trap?

For explaining the concept, Professor R.P Nelson used three models given below.

1) Capital formation

2) Population growth and

3) Per capita income growth and population growth.

Each of these models and its working are briefly explained given below.

1) Capital Formation

The relationship between capital formation and per capita income can be represented pictorially as showing in the figure below.

An economy suffers deficiency in capital when it began to grew, that is particularly in the case of underdeveloped economies. In the initial stage of development, the incentive to invest money by the capitalists will be lower. So, the lower level of income earned by the people will spend on consumption purposes. Even though there is no income for the p[people, they will consume to bridge the life. such type of consumption is called ‘conspicuous consumption’. It is shown in the figure (area C). Gradually when economy starts its journey of development, there will generate more employment and income. In the figure, point ‘S’ showing the equality in income and expenditure. So at ‘S’ saving will be zero. Beyond the point ‘S’, the economy will ensure higher productivity and more income. Which in fact increase the level of savings. Savings will boost the process of investment. More investment represents higher capital formation.

2) Population growth

Here Nelson analysis the relationship between per capita income to the population growth rate. It can be represent pictorially as like in the figure below.

Nelson says that, the population growth will remain lower in the initial stages of development. When the economy grows the workers will earn more wage rates. Once they began to earn wages above the subsistent level, population will increase steadily. When the economy achieved development, the per capita income will be maximum and there will be a declining trend in population growth and birth rate.

In the figure, at point ‘S’, the population growth is normal. When per capita income grows more than the subsistent wage rate, population will increase steadily (point ‘S’ to ‘E’ in the figure). Then the population growth will shows a stable or declining trend. This is because of the maximum level of per capita income.

3) Per capita income and population growth

Nelson’s low-level equilibrium trap mainly focuses on the possible trends in the per capita income and population growth of an economy with its developmental progress. It can be explained with the following figure.

In the above figure, changes in Gross National Product (GNP) are represented on the ‘x’ axis. Changes in per capita income and population are represented on the ‘y’ axis. Initially (underdeveloped stage), the country’s income and population growth will be much lower or negative (negative part of ‘y’ axis (below point ‘S’)). When income increase above the subsistent wage rate, population will grew. However, the population growth will be much higher than the growth in income. This is the general phenomenon in developing economies. Here the trap is the so called “over population”. When the economy achieved development ( more GNP, above point ‘A’), the per capita income will be higher to the population growth rate. This condition can be see in many developed economies of the world.

Why population trap in the initial stages of development?

Initially the growth rate in population will be higher to the growth rate in per capita income. There are few reasons for this over population trap.

Firstly, the workers will earn more when economy enters in to the path of development. But increasing of wage rate may not increase savings, because will spend their income to meet autonomous consumption. Further higher population growth will badly affect the per capita income share. So per capita income will be lower. Another reason is that since population growth rate is higher the availability of land area will be lower. This will badly affect further production and national output. Finally under developed countries are characterized with obsolete production methods. So per capita income will be lower because the productivity is poor.

How to solve the population trap ?

Over population related problems are common in under developed and developing economies. So to grow more such countries are required to follow some things as listed below.

i) Government must ready to invest in the economy particularly in those industries, which are not interested by the public.

ii) There should implement speedy modernization. Because modernization will ensure higher productivity.

iii) Ther should be an improvement in the social, political and economical environment of the country.

iv) The government take keen observation in the matters of equitable distribution of income.

v) The economy must open to encourage trade and commerce. Which are they keys for employment generation.

vi) The economy must implement better entrepreneurial skills. Which will helps to utilize the resources in an optimum way.

Population and developed stage

Once the economy able to increase its labor efficiency, productivity, capital formation etc, it will help to achieve development. In developed stage (above point ‘E’ in figure III), per capita income growth is higher than the population growth rate. This condition can be see in most of the developed countries.

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