Nelson’s Low Level of

Equilibrium Trap
The Theory
• Richard R. Nelson in his theory ‘Low Level of Equilibrium Trap’
that he outlined in 1956 argued that if we look at the Third
World Countries (TWC), there exists a vicious circle of poverty
where poverty is the cause and effect of poverty.
• In order to pull the TWCs out of the trap, an investment over
and above a certain minimum is required and only then it will
have the capacity of moving the economy on higher paths of
economic development. He stressed on the Balanced Growth
Strategy where in large investment in made through way of
synchronized application of capital to cater to complementarities
of demand
Key Characteristics
• He postulated that population growth is a function of per capita
income of the country. There exists a positive relationship
between population growth and per capita income at the initial
stages of development i.e. as the per capita income increases,
rate of growth of population also increases.
• After that with increase in per capita income, rate of growth of
population is constant till a certain level. Beyond that level with
further rise in the per capita income, population growth will fall
Key Characteristics
• He postulated that addition to the capital stock takes place in
two forms. One by the increase in the quantum of natural
resources which he assumes to be negligible and second by the
savings created capital per capita.
• Hence he assumes that addition to the capital stock is equal to
savings created capital per capita.
• The economy is having inefficient techniques of production.
• The economy is furnished with social and cultural inertia.
People are risk averse and resist change.
Basic Propositions
• Nelson’s low-level equilibrium trap theory is based on two
propositions:
i. The population will increase when the per capita income of the
country rises above the minimum subsistence level. But beyond a
limit a rise in per capita income may be accompanied by a declining
population growth rate.
ii. At low level of per capita income people are too poor to save and
invest. The low level of investment results in a low rate of growth in
national income.
Why the trap?
Harris Todaro Migration Model

• John R. Harris and Michael P. Todaro presented the seminal ‘Two sector model’ in American Economic
Association, 1970. Thismodel is a pioneering study in the field encompassing rural-urban migration. The
classical theory is used in development economics and is an economic illustration of migrants’ decision on
expected income differentials between rural (agriculture) and urban (manufacturing) areas.
• The model of rural-urban migration is typically studied in the context of employment and unemployment
situation in developing countries. The purpose of the model is to explain the critical urban unemployment
problem in developing countries.The key hypothesis of Harris and Todaro’s modelis that economic
incentives, earnings differentials, and the probability of getting a job at the destination have influence on the
migration decision. In other words, this theoryputs forward that rural-urban migration will occur when the
urban expected wage exceeds the rural obtain wage.