Development economics

Name: Nguyễn Thị Thùy Linh
Class: A4 high quality international economics
Subject: Development Economics
Exercise: Compare the four model in chapter 3.

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
2. 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

1. the level of assumption :
there is no reason for growth to
be sufficient to maintain full
employment;
2. 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.