Chapter 3.docx - ECO2117 L3 1 Classic Theories of Economic...

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ECO2117 L3 1 Classic Theories of Economic Growth and Development Classic Theories of Economic Development: Four Approaches 1. Linear stages of growth model 2. Theories and patterns of structural change 3. International-dependence revolution 4. Neoclassical, free market counterrevolution Development as Growth and Linear-Stages Theories A Classic Statement: Rostow’s Stages of Growth According to Rostow, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed: 1. Traditional society 2. Preconditions for take-off into self-sustaining growth 3. Take-off 4. Drive to maturity 5. Age of high mass consumption Harrod-Domar Growth Model (sometimes referred to as the AK model): A functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c) Capital-output ratio : A ratio that shows the units of capital required to produce a unit of output over a given period of time. Net savings ratio : Savings expressed as a proportion of disposable income over some period of time. The Harrod-Domar Model Simplified Version
ECO2117 L3 2 The Harrod-Domar Model Incorporating Capital Depreciation Equation 3.7 is also often expressed in terms of gross savings, in which case the growth rate is given by: where δ is the rate of capital depreciation Necessary condition : A condition that must be present for an event to occur. For example, capital formation may be a necessary condition for sustained economic growth (before growth in output can occur, there must be tools to produce it). But for this growth to continue, social, institutional, and attitudinal changes may have to occur. Sufficient condition : A condition that when present causes or guarantees that an event will or
ECO2117 L3 3 can occur; in economic models, a condition that logically requires that a statement must be true (or a result must hold) given other assumptions. Criticisms of the Stages Model The mechanisms of development embodied in the theory of stages of growth do not always work. - Saving and investment are necessary conditions for accelerated rates of economic growth but not sufficient conditions . The Marshall Plan worked for Europe because the European countries receiving aid possessed the necessary structural, institutional, and attitudinal conditions. The Rostow and Harrod-Domar models implicitly assume the existence of these same attitudes and arrangements in underdeveloped nations.

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