Development economics

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Name: Nguyễn Thị Thùy Linh Class: A4 high quality international economics Subject: Development Economics Exercise: Compare the four model in chapter The theory of balanced growth Author Theory Content Rosenstein- Rodan (1943), Ragnar Nurkse (1907–1959) The government of any underdeveloped country needs to make large investments in a number of industries simultaneously This would consequently enlarge the market size and provide an incentive for the private sector to invest Inducement to invest is limited by the size of the market According to Nurkse, underdeveloped countries lack adequate purchasing power Low purchasing Harrod- Domar model Sir Roy F Harrod and Evsey Domar This model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital It suggests that there is no natural reason for an economy to have balanced growth and proves that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through technological advances Let Y represent output, which equals income, and let K equal the capital stock S is total saving, s is the savings rate, and I is investment δ stands for the rate of depreciation of the capital stock The Harrod– Domar model makes the The model of low equilibrium trap Solow model ( Exogenous growth model) Richard R Nelson Robert Solow “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 In this model, new capital is more valuable than old (vintage) capital because— since capital is produced based on known technology, and technology improves with time —new capital will be more productive than old capital 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 Macro-production function This is a Cobb–Douglas function where Y represents the total production in an economy A represents multifa power means that the real income of the people is on the lower side, although in monetary terms it may be high Had the money income been low, the problem could easily have been overcome by expanding the supply of money But since the meaning in this context is real income, expanding the money supply will only generate inflationary pressure Neither real output nor real investment will rise It is to be noted that a low purchasing power would mean that domestic demand for commodities is low Apart from encompassing consumer goods and services, this includes the demand for capital (capital (economics)) too The size of the market determines the incentive to invest irrespective of the following a priori assumptions: Y= f(K) 1: Output is a function of capital stock 2: The marginal product of capital is constant; the production function exhibits constant returns to scale This implies capital's marginal and average products are equal 3: Capital is necessary for output 4: The product of the savings rate and output equals saving, which equals investment 5: The change in the capital stock equals investment less the depreciation of the capital stock The savings rate times the marginal product of capital minus the depreciation rate equals the output growth rate 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 ctor productivity (often generalized as technology), K is capital and L is labor An important relation in the macro-production function: which is the macro-production function divided by L to give total production per capita y and the capital intensity 'k Savings function This function depicts savings, I as a portion s of the total production Y Change in capital T he d is depreciation Change in workforce 'n' is the rate of growth e.g n=0.02 would nature of the economy Pessimism: 1.The finance for this development must arise to as large an extent as possible from the underdeveloped country itself financing through increased trade or foreign investments was a strategy used in the past - the 19th century - and was limited to the case of the United States of America To quote Hirschman, "If a country were ready to apply the doctrine of balanced growth, then it would not be underdeveloped in the first place."[ Criticism Increasing the savings rate, increasing the marginal product of capital, or decreasing the depreciation rate will increase the growth rate of output the level of assumption : there is no reason for growth to be sufficient to maintain full employment; The model sees economic growth and development as the same mean 2% rise in 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 or a Empirical evidence offers mixed support for the model Limitations of the model include its failure to take account of entrepreneurship (which may be a catalyst behind economic growth) and strength of institutions (which facilitate economic growth) In addition, it does not explain how or why technological progress occurs This failing has led to the development of endogenous growth theory, which endogenizes technological progress and/or knowledge accumulation ... Apart from encompassing consumer goods and services, this includes the demand for capital (capital (economics) ) too The size of the market determines the incentive to invest irrespective of the following... is the rate of growth e.g n=0.02 would nature of the economy Pessimism: 1.The finance for this development must arise to as large an extent as possible from the underdeveloped country itself... reason for growth to be sufficient to maintain full employment; The model sees economic growth and development as the same mean 2% rise in Population growth is assumed an increasing function of per
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