Bank of Estonia. Euroopa Liidu alast infot. General observations on nominal and real convergence Real convergence. For the applicant countries the economic rationale of the European integration for applicant countries lies in the assumption that over medium term the reform process results over medium term in real growth rates above those of the present member states. Thus, the gap between per capita income in present and future member states diminishes as higher productivity growth results in higher real income, i.e., the real convergence occurs.
Several factors explain the speed of the real convergence.
Initial income level, propensity to invest during the reform process, expenditures for education and other investment in human capital, and development of institutions are among the most common explanations. Real and nominal convergence. The real convergence will result in nominal convergence higher income will gradually raise the domestic price level. The nominal convergence is explained by different rates of productivity growth in open and sheltered sector of economy, by changes in consumer preferences as real incomes increase and to a certain extent by the improvement in terms of trade as the value added component of export production increases. The resulting increase of prices of nontradables over the price of tradables puts gradual upward pressure on the overall price level.