Chapter 3 Development

Chapter 3 Development - Chapter 3: Classic Theories of...

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Chapter 3: Classic Theories of Economic Growth and Development Every nation strives for eco development. Eco progress is an essential component, but not the only component. Development must include more than the material and financial side of peoples life, to expand human freedoms. Development should be perceived as a multidimensional process involving the reorganization and reorientation of entire economic and social systems. In addition to improvements in income and output, it involves changes in institutional, social and administrative structures as well as customs and beliefs. Development as Growth and the Linear-Stages Theories Rostow’s Stages of Growth The stages of growth model of Development – according to Rostow the transition from underdevelopment to development can be described in a series of steps or stages through which all countries must proceed. The advanced countries had all passed the stage of “takeoff into self sustaining growth”, and the underdeveloped countries that were in either the traditional society or preconditions stage had only to follow a certain set of rules of development to take off in their turn into self sustaining economic growth. Principle stages of development necessary for any takeoff was the mobilization of domestic and foreign saving in order to generate investment to accelerate growth. This is often described in the Harrod-Domar Model or AK model because it is based on a linear production function – with output given by the capital stock times a constant, A. The Harrod-Domar Growth Model The economy must save a proportion of its national income, if only to replace worn out or impaired capital goods (buildings, and materials). However, in order to grown, new investments representing net additions to the capital stock are necessary. If we assume that there is some direct economic relationship between the size of the capital stock (K) and total GDP (Y), if follows that any additions to the capital stock in the form of new investment will bring about corresponding increases in the flow of national output, GDP. Suppose that this relationship (the capital-output ratio – ratio showing the units of capital required to produe a unit of output over a given time period) is 3 to 1 – it is defined at k, and assume that the national net savings ratio (s) is a fix ed proportion of national output and that total new investment is determined by the level of total savings, we can construct the following simple model of eco growth. 1. savings is some proportion of national income: S = sY 2. Net investment is defined as the change in the capital stock and back be represented as the change in K: I = K But, because the total capital, K , bears a direct relationship to total national income or output, as expressed by the capital-output ratio, c: K/y=c Or the change in capital stock/ change in output = c Or finally the change in capital stock = capital-output ratio x change in output 3. Because net savings must be equal to net investment can write it as S=I
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Chapter 3 Development - Chapter 3: Classic Theories of...

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