MEC

MASTER OF ARTS
(ECONOMICS)

ASSIGNMENTS 2019-20
First Year Courses
(For July 2019 and January 2020 Sessions)

School of Social Sciences

Indira Gandhi National Open University
Maidan Garhi, New Delhi-110 068
 Master of Arts (Economics)
(TMA)

(2019-20)

Dear Student,

As explained in the programme guide for MEC, assignments carry 30 per cent weightage
in a course and it is mandatory that you have to secure at least 40 per cent marks in
assignments to complete a course successfully. Note that you have to submit the
assignments before appearing in Term End Examination of a course.

Before attempting the assignments please read the instructions provided in the
programme guide sent to you separately. In this booklet we have included the
assignments for all the courses pertaining to the second year. In each course there is a
Tutor Marked Assignment (TMA). You have to do the assignment for those courses for
which you have registered. Do remember that you have to prepare and submit the
assignments separately for each course. Make sure that you submit the assignments well
in time for those courses in which you plan to appear in the Term End Examination.

Submission

For July 2019 session, you need to submit the assignments by March 31, 2020, and for
January 2020 session by September 30, 2020 for being eligible to appear in the term-
end examination. Assignments should be submitted to the Coordinator of your Study
Centre. Obtain a receipt from the Study Centre towards submission.

2
 MEC-004: ECONOMICS OF GROWTH AND DEVELOPMENT
Assignment (TMA)

Course Code: MEC-004

Asst. Code: MEC-004 / AST-1/2019-2020
Total Marks: 100

Answer all the questions. Each question in Section A carried 20 marks while that in Section
B carries 12 marks.

Section A

1) Discuss the main sources of economic growth. Discuss the main adverse repercussions on the
economy that the process of economic growth can have.

2) What do you understand by technical progress? What is the relationship between technical
progress and growth of total factor productivity? Discuss the various conceptions of neutral
technical progress as put forward by Hicks, Harrod and Solow.

Section B

3) Describe the Mankiw-Romer-Weil extension to the neoclassical model to include human

capital. Explain why diminishing returns to capital do not take place in the AK model.

4) What are the main propositions of the Real Business Cycle model? Describe the basic
structure of a prototype Real Business Cycle model.

5) Compare and contrast Adam Smith’s theory of development with that of Ricardo’s.

6) Discuss the Harris-Todaro model of migration. What has been the impact of this model?
What is its relevance for developing nations?

7) Explain the meaning of cost-benefit analysis. Describe briefly the usual steps taken in a
typical cost-benefit exercise.

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M.E.C.-4
Economics of Growth And Development
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the
Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance
of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100%
accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample
answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment.
As these solutions and answers are prepared by the private Teacher/Tutor so the chances of error or mistake cannot be
denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/
Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact
information, data and solution. Student should must read and refer the official study material provided by the university.

Answer all the questions. Each question in Section A carried 20 marks while that in Section B carries
12 marks.
Section A
Q. 1. Discuss the main sources of economic growth. Discuss the main adverse repercussions on the economy
that the process of economic growth can have.
Ans. Economic growth is a complex process that generally involves several interrelated factors. Economists
stress the importance of three major sources of economic progress:
(a) investment in physical and human capital,
(b) technological advances, and,
(c) institutional and policy changes that improve the efficiency of economic organisation.
(i) competitive markets,
(ii) stable prices,
(iii) free trade,
(iv) flexible capital markets,
(v) avoidance of high marginal tax rates
(vi) secure property rights, and
(vii) political stability,
The stock of capital and the rate of capital accumulation in most cases settle the question whether at a given
point of time a country will grow at what pace. There are few other economic factors which also have some bearing
on development but their importance is hardly comparable to that of capital formation.
Capital Formation: More capital generally means more production, and more production means more growth.
To get capital, countries have to invest and so the level of investment may be a big determinant of future growth. So,
Capital formation is of crucial importance in the process of economic growth.
Capital-Output Ratio: Another determinant of economic growth is the capitaloutput ratio. The term ‘capital-
output ratio’ refers to the number of units of capital that are required in order to produce one unit of output. In other
words, capitaloutput ratio reflects the productivity of capital in the various sectors of the economy at a point of

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time. The capital-output ratio for the economy as a whole is only a shorthand description of the productivity of
capital.
Occupational Structure: Another factor which determines and is determined in due course by economic growth
process is the occupational structure of the working population. Experience from all over the world suggests that in
the process of growth, transfer of working force from primary to secondary and then secondary to tertiary sector of
the economy has invariably taken place.
Technological Progress: This is perhaps the most widely accepted (and easiest to understand) source of economic
growth. This is because technology makes it possible to produce more from the same quantity of resources (or
factors of production). This boosts the potential level of out put of the economy.
The process of economic growth has certain limitations as well. These could have serious social and economic
repercussions for the society.
Inequality of income: Growth rarely delivers its benefits evenly. So the issue of distribution of the fruits of the
growth process becomes first important limitation of process of economic growth. There is evidence to suggest that,
at least in the initial stages of development; growth tends to worsen the distribution of income.
Pollution (and other negative externalities): The drive for increased output tends to put more and more
pressure on the environment and the result will often be increased pollution – air, water, and noise. This may be
water or air pollution, but growth also creates significantly increased noise pollution. Traffic growth and increased
congestion are prime examples of this.
Loss of non-renewable resources: The more we want to produce, the more resources we need to do that. The
faster we use these resources, the less time they will last. This invariably leads to loss of non-renewable resources
like oil, and other minerals, forests etc.
Q. 2. What do you understand by technical progress? What is the relationship between technical progress
and growth of total factor productivity? Discuss the various conceptions of neutral technical progress as put
forward by Hicks, Harrod and Solow.
Ans. The technical progress function (TPF) is an economic measure that seeks to identify the attributable
influence of technological progress on total output through the use of a regression model. Technological progress
can be an important factor in a country’s economic growth because it helps a country to produce more through the
use of better technology on the input side of the production equation. Thus, rather than looking at economic produc-
tion growth purely in terms of input allocation efficiency, the technical progress function provides a way for mea-
suring technological progress as a contributor to final production overall.
Technological change or progress refers to the discovery of the new and improved methods of producing
goods. Sometimes technological advances result in the increase in available supplies of natural resources. But more
generally technological changes result in increasing the productivity of labour, capital and other resources. The
productivity of combined inputs of all factors is called total factor productivity. Thus technological progress means
increase in total factor productivity. As a result of technological advance, it becomes possible to produce more
output with same resources or the same amount of product with less resource.
Thus technological change, or more precisely technological progress, is the change in the production process
which results in an increased output per unit of labour. Technological change causes a shift in the production
function embodying all known techniques. Technological change must be distinguished from a change in technique.
While by technological change we mean advance in knowledge resulting in improved methods of production,
change in technique refers to the use of a different but already known method of production.

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The process of economic growth involves the increase in the production of goods and services. Increase in
production can be achieved either through the use of more resources and/or through the realization of higher
productivity by means of using the resources of labour, capital and land more efficiently. Technological change
helps to promote growth in both these ways. It can help in the discovery of new natural resources in the country and
thereby enhances the productive potential of the country. Technological change also increases the productivity of
available resources.
Hicks conception: Technical progress where with any given factor proportions the average and marginal products
of all factors increase in the same proportion. Thus if Y = F(K, L), where Y is output, K is labour, and L is capital,
and the function F(K, L) has constant returns to scale, output after Hicks-neutral technical progress where the
productivity of each factor rises to  > 1 times its former level is given by
Y* = F(K, L) = F(K, L) = vY.
Harrod conception : Prof. Harrod in his book ”Towards a Dynamic Economics” has defined neutral technical
progress in a different way. His definition is based on capital output ratio. According to him, neutral technical
progress is one which leaves capital output ratio unchanged, provided that rate of profit remains constant. Thus,
Harrod’s neutrality of technical progress requires the constancy of both the rate of profit r and capital output ratio
K/Y.
Solow conception: Solow’s classification of technical progress is similar to Harrod’s and Hicks’s classification
except in one respect. Hicks’s classification compares points on different per-worker output curves at points of
constant capital-labour ratio and Harrod’s scheme compares points on different per-worker output curves at points
of constant capital-output ratio. Solow’s classification
é¥ compares
β u (c
ù points on old and new per-worker production at
E j
,l )úú
1 + j 1 + j

points at which the labour-output ratio is constant. Thus,

êë
j= 0
Solow’s neutrality is when at points where K/Y is constant,
that is, the relative shares of capital and labour remains constant. 5can be shown that a Solow-neutral technical
progress is capital augmenting.
Section B
Q. 3. Describe the Mankiw-Romer-Weil extension to the neoclassical model to include human capital.
Explain why diminishing returns to capital do not take place in the AK model.
Ans. Mankiw, Romer and Weil in a 1992 paper gave a marginal extension to the neoclassical model - include
human capital (H) as a distinct factor of production. K and H are allowed to vary together across countries and
arrive at decent results for the example discussed earlier. The Mankiw Romer Weil formulation maintains the
Solow assumption of decreasing returns to the factor capital. Their model is thus within the tradition. The motiva-
tion and structure of the Mankiw, Romer and Weil (MRW) model can be presented as follows. Suppose we consider
an economy which produces an output Y using physical capital in combination with human capital, according to a
constant returns to scale Cobb-Douglas production function.
1- α
Y = K α (AH ) , where A represents labour augmenting technology that grows at Models an exogenous rate g.
According to Mankiw, Romer and Weil, people accumulate human capital the way they accumulate physical capital-
by foregoing current consumption. Lucas on the other hand posits that individuals spend by in accumulating skills.
The AK model of endogenous growth is the basic type of formulation that captures the essence of endogenous
growth. Sergio Rebelo in an article titled “Long Run Policy Analysis and Long Run Growlh” published in 1991,
introduced the AK model, building upon earlier work by Romer and Lucas. The basic equation of the AK model is
Y = AK . Here A is to be understood as factors that affect technology, and K includes physical as well as human
capital. This model has no diminishing returns. One way to achieve this is to invoke some kind of externalities or

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spillovers. Another way to stave off diminishing returns is to postulate that an increasing variety or quality of
intermediate inputs.
The growth rate of the output is an increasing function of the rate of investment. The general progression in that
area has been to attribute a smaller fraction of observed growth to the residual and a higher fraction to the accumulation
of inputs. The way that literature started out was a statement that technology is extremely important because it
explains the bulk of growth. Endogenous growth theory admits that technology does not explain, by itself, the
majority of growth.
Q. 4. What are the main propositions of the Real Business Cycle model? Describe the basic structure of a
prototype Real Business Cycle model.
Ans. There are two types of propositions in real business cycle model. First, it says that although we usually
look at long term growth and short term fluctuations in economic activity separately, the same reasons that give rise
to long run growth, also cause fluctuations in economic activity, or what traditionally have been called ‘business
cycles’. The real business cycle theorists prefer the use of the word ‘fluctuations’ to ‘cycles’, since the latter con-
veys a sense of regular recurrence, which might not actually be the case. The ‘real’ part of the RBC theory suggests
that as a theory that attempts to explain business fluctuations, these models play down the role of monetary forces
and believe, like the classical economists, that money is a veil. They insist that it is the real forces like production,
supply shocks etc, that actually lead to fluctuations. Moreover, the RBC theorists play down the demand side of the
economy and maintain that the Keynesian (and even the monetarist) approach lays too much emphasis on the
aggregate demand. Because RBC theory emphasises on relative prices rather than the absolute price level, and
believes that money is neutral, and also because it lays emphasis on supply side forces, this theory displays similar-
ity with the earlier classical theorists of growth and development. It is for this reason that RBC theory is sometimes
put together with some other theories and dubbed ‘New Classical’. RBC models not only look at productivity
shocks, but also focus more on the propagation of shocks to the rest of the economy than other theories.
RBC Model prototype:
The RBC model builds upon the Brock-Mirman model of the case where discounting is present, but extends
that model. Basically the RBG explicitly bring into the utility function a decision regarding labour and leisure,
where it is assumed that leisure provides utility and leisure is the time left over from total time after labour has been
provided.
The structure is a dynamic optimisation-under-uncertainty case. We can present it as follows.
The idea is to think of maximising the following type of utility function.
é¥ ù
E êêå β j u (c1 + j , l1 + j )úú, Here c and I denote the representative household’s consumption and leisure activies.
ëêj = 0 û ú
consumption and leisure activities.  is a discount factor that lies between 0 and 1. Leisure is time not devoted to
labour. E is the operator showing mathematical expectation, conditional upon information at time t. in the above
formulatin t denotes the time at which the optimisation exercise is carried out. In our earlier examples we had taken
t = 0, and what we are denoting here by j, we had denoted by t.
Q. 5. Compare and contrast Adam Smith’s theory of development with that of Ricardo’s.
Ans. ADAM SMITH’S THEORY OF ECONOMIC DEVELOPMENT
Adam Smith proposed that
(a) Population growth, in the traditional manner of the time, was endogenous. It depended on the sustenance
available to accommodate the increasing workforce.

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(b) Investment was also endogenous; determined by the rate of savings (mostly by capitalists);
(c) Land growth was dependent on conquest of new lands (e.g. colonisation) or technological improvements
of fertility of old lands.
(d) Technological progress could also increase growth overall; Smith’s famous thesis that the division of
labour or specialisation improves growth was a fundamental argument.
(e) Smith also saw improvements in machinery and international trade as engines of growth as they facilitated
further specialisation.
(f) He also assumed the existence of perfect competition.
Smith’s model has the great merit of pointing out ‘how economic growth came about and what factors and
policies impede it’. In particular, he pointed out the importance of parsimony in saving and capital accumulation; of
improved technology, division of labour and expansion of market in production; and of the process of balanced
growth in the interdependence of farmers, traders and producers. Despite these merits, it has certain weaknesses.
1. Rigid division of Society: Smith’s theory is based on the socio-economic environment prevailing is Great
Britain and certain parts of Europe. It assumes the existence of a rigid division of society between capitalists
(Including land lords) and labourers. But the middle class occupies an important place in modern society. Thus, this
theory neglects the role of middle class.
2. One sided saving base: According to Smith, Capitalists, landlords and money lenders save. This is, however,
a one-sided base of saving because it did not occur to him that the major source of savings in our advance society
was the income receivers and not the capitalists and landlords.
3. Unrealistic assumption of perfect competition: Smith’s whole model is based upon the unrealistic assumption
of perfect competition. The laissez-faire policy of perfect competition is not to be found in any economy. Rather, a
number of restrictions are imposed on the private sector, and on internal and international trade in every country of
the world.
4. Neglect of Entrepreneur: Smith neglects the role of entrepreneur is development. This is a serous defect as
his theory. The entrepreneur is the focal point of development, as pointed out by Schumpeter. It is the entrepreneur
who organizes and brings about innovations there by leading to capital formation.
5. Unrealistic Assumption of Stationery State: Smith is of the view that the end result of a capitalist economy
is the stationery state. It implies that there is change in such an economy but around a point of equilibrium. There is
progress but it is steady, uniform and regular like a tree. Thus, the assumption of stationary state is unrealistic.
RICARDIAN THEORY OF ECONOMIC DEVELOPMENT
The assumptions of his model included:
(a) all land is used for production of corn,
(b) law of diminishing returns operates,
(c) supply of land is fixed,
(d) demand for corn is perfectly is elastic,
(e) labour and capital are variable inputs,
(f) state of technical knowledge is given,
(g) all workers are paid a subsistence wage,
(h) supply price and labour is given and constant,
(i) demand for labour depends upon accumulations,
(j) capital accumulation results from profit and
(k) there is perfect competition.

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Though weak in some situations, Ricardo’s theory is of great importance. He emphasized the importance of
agricultural development in economic growth because industrial development depends upon it. He emphasizes the
importance of high rate “of profit for economic development because capital accumulation depends upon it. Modern
economists also recognise this fact. Saving must be there for higher capital accumulation. He has also given importance
to foreign trade. He was against colonial trade because it depresses the industry of all other countries. He has given
us a dynamic theory which analyses the effects of change in different variables on economic development such as
population, wage, rent, profit etc. Ricardo’s portrait however, is somewhat more pessimistic than Smith’s.
Despite this the theory has certain weaknesses also.
1. Neglects the impact of technology: Ricardo pointed out that improved technology in industrial field leads
to the displacement of labour and other adverse consequences. But Ricardo failed to visualize the impact that
science and technology had on the rapid economic development of the new developed nations.
2. Wrong Notion of Stationary State: The Ricardian view that the system reaches the stationary state
automatically is baseless because no economy attains the stationary state is which profits are increasing, production
is rising and capital accumulation is taking place.
3. Baseless Notion of Population: The Ricardian view that wage rate can (does) not rise above. The subsistence
level is wrong. In western countries there has been rise in wage rate but population has decreased.
4. Unnecessary Importance to the law of Diminishing Returns: Ricardian theory is primarily based on the
law of diminishing returns but the rapid increase of farm produce in advanced nations has proved that Ricardo
under-estimated the potentialities of technological progress is counteracting diminishing returns to land.
5. Impracticable laissez-faire Policy: According to this theory there should be no government interference
and the economy will operate automatically through perfect competition. I reality no economy is free from government
interference and in which perfect competition prevails.
Q. 6. Discuss the Harris-Todaro model of migration. What has been the impact of this model? What is its
relevance for developing nations?
Ans. The model by Harris-Todaro, explains the apparently paradoxical relationship of accelerated rural-urban
migration in the context of rising urban employment. The four basic elements of the Harris-Todaro model are as
follows:
1. Rural-urban migration is stimulated by rational economic considerations of relative benefits and costs mostly
financial and psychological.
2. The decision to migrate depends upon expected rather than actual urban-rural real wage differentials where
expected differential is determined by the interaction of tow variables, the actual urban-rural wage differential and
the probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban is directly related to the urban employment rate and inversely related
to urban unemployment.
4. Migration rates in excess of urban top opportunity growth rates are not only possible but also rational and
even likely in the face of wide urban-rural expected income differential. High rates of urban unemployment are,
therefore, inevitable outcomes of serious imbalance of economic opportunities between urban and rural areas in
most developing countries.

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Impact of the model:

The model provides an adjustment mechanism by which workers allocate them selves between rural urban
labour markets. At the same time it suggests that there is a need for a comprehensive migration and employment
strategy. The key elements of such a strategy can stated as follows:
The main thrust of the strategy should be on the integrated rural development, spread of small-scale industries,
reorientation of economic activity and social investment in rural areas. The strategy based on this element
would help mitigate urban and rural unemployment problem on one hand and discourage the migration on
the other.
To slow down the face of rural-urban migration and to create employment opportunities in rural areas, stress
should be on the labour-intensive industries. The expansion of small scale and rural industries can be
accomplished directly by the government investment and incentives and indirectly through income distribution
to the poor.
The development experience of developing countries that in initial stages these countries have been almost
dependence on labour technology. The technological dependence of developing nations on imported
machinery and equipment from developed nations has been one of the main factors affecting the long run
programmes of employment generation both in urban industry and rural agriculture. To reduce this
dependence, domestic efforts should be made for the development of small scale, labour intensive and low
cost methods for meeting the rural infrastructure needs including roads, irrigation, drainage, essential health
and elementary education services.
An employment generating policy must aim at reducing population growth through reduction absolute poverty
and inequality, expanded provision of family planning and rural health services. The long run solution of
employment and urbanisation problems required the lowering of high rates of population growth.
Relevance for developing nation: The model is relevant to developing countries even if the wage is not
institutionally determined. Recent literature on rural-urban migration has confirmed that emergence of high modern-
sector wage alongside unemployment can also result from market responses to imperfect information, labour turnover
and other com’mon features of labour market. While this model focuses on the institutional determinants of urban
wags rates above the equilibrium wags, others have sought wage explain this - phenomenon by focusing on the high
cost of labour turnover in urban areas and the nation of an efficiency wage; an above-equilibrium urban wage
enables employers to secure a high-quality work force and greater productivity on She job.
Q. 7. Explain the meaning of cost-benefit analysis. Describe briefly the usual steps taken in a typical cost-
benefit exercise.
Ans. Cost-Benefit analysis (CBA) is a technique which is used to appraise and evaluate projects. The basic idea
in CBA is quite simple: first identify the costs and benefits of a project and then measure them in comparable units
(say in terms of money, and expressed in a single currency). Compare the benefits and the costs. If the benefits
exceed the costs, the project should be accepted as resource allocation will be efficient. If, on the other hand, costs
exceed benefits, then reject the project. The desirability or feasibility of projects, whether in the private or public
sector are adjudged on the basis of criteria that are rooted in the concept of profits. Profitability is contingent upon
the likely costs that the project entails, and the likely returns that it generates. The two sectors, public and private,
however may differ (sometimes widely) on the explicit recognition of the prices at which the value of output and the
cost of inputs are to be evaluated. While the analysis of projects in the private sector generally incorporates the
direct and financial costs and benefits only, the analysis of public sector projects attempts to encompass the indirect
and non-financial costs also.

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Steps of Cost-Benefit Analysis:

1. Define the framework for the analysis: Identify the state of affairs before and after the policy change or
investment on a particular project. Analyze the cost of this status quo. We need to first measure the profit of taking
up this investment option as opposed to doing nothing or being on ground zero.
2. Identity and classify costs and benefits: It is important to costs and benefits are classified in the following
manner so as to ensure that you understand the effects of each cost and benefit.
3. Drawing a timeline for expected costs and revenue: When it comes to decision making, timing is the most
important element. Mapping needs to be done when the costs and benefits will occur and how much they will pan
out over a phase. This solves two major issues. Firstly, a defined timeline enables businesses to align themselves to
the expectations of all interested parties. Secondly, understanding the timeline allows them to plan for the impact
that the cost and revenue will have on the operations. This empowers businesses to better manage things and take
steps ahead of any contingencies.
4. Monetize costs and benefits: We must ensure to place all costs and all benefits in the same monetary unit.
5. Discount costs and benefits to obtain present values: This implies converting future costs and benefits
into present value. This is also known as discounting the cash flows or benefits by a suitable discount rate. Every
business tends to have a different discount rate.
6. Compute net present values: This is done by subtracting costs from benefits. The investment proposition is
considered efficient if a positive result is obtained. However, there are other factors to be considered as well.

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