THE MWALIMU NYERERE MEMORIAL ACADEMY

KARUME CAMPUS, ZANZIBAR

DEPERTMENT OF ECONOMICS STUDIES
ORDINARY DIPLOMA IN ECONOMIC DEVELOPMENT

MODULE NAME: INTRODUCTION TO ECONOMIC ISSUES AND DEVELOPMENT

COURSE CODE: EST 06103

INSTRUCTOR NAME: MR. ALLEN

NATURE OF WORK: GROUP ASSIGNMENT

PARTICIPANTS;

NAME REGISTRATION NUMBER

SALUM, ABDULLATIF JUMA MNMA/ODZ.ED/0013/18
SARBOKO, PILI MAKARANI MNMA/ODZ.ED/0037/18
MKONYI, GIBSON GODSON MNMA/ODZ.ED/0016/18
KHAMIS, HAJI GORA MNMA/ODZ.ED/0025/18
SAID, SWAUMU SHABANI MNMA/ODZ.ED/0018/18
MOH’D, NASRA MASHAKA MNMA/ODZ.ED/0029/18
KHAMIS, RAIFA JUMA MNMA/ODZ.ED/0001/18
USSI, WARDA MOH’D MNMA/ODZ.ED/0034/18

QUESTION: 1. How Gross National Product differs from Gross Domestic Product?
2. What are the causes of Economic Growth in Tanzania!
3. Explain at least two theories of Economic Growth and Development.

SUBMISSION DATE: 17 December 2019.

A) Gross national product (GNP) is the market value of final goods and services produced in
the economy within a specified period of time normally one year. It includes production of goods
and services produced by the citizens of the country, living within the country and outside the
country while Gross domestic product (GDP) is the market value of final goods and services
produced in the economy within a specified period of time normally one year. It includes
production of goods and services produced by the citizens and foreigners living within the
country.
B) Economic growth is the quantitative increase in national output, it means increase the
volume of goods and services produced in the country. Economic growth is caused by an
increase in aggregate demand and aggregate supply.
An increase in aggregate demand (AD)
In the short term, economic growth is caused by an increase in aggregate demand (AD). If there
is spare capacity in the economy, then an increase in AD will cause a higher level of real GDP.

AD= C + I + G + X- M

Factors which affect AD

i. Lower interest rates. Lower interest rates reduce the cost of borrowing and so
encourages consumer spending and firms to invest. Lower interest rates also reduce
mortgage payments and so increase the disposable income of consumers.
ii. Increased government spending (G). E.g. government investment on building new
roads or increased spending on welfare benefits, which increase disposable income.
iii. Confidence. Increased consumer confidence encourages households to spend by either
running down savings or taking out more personal credit. It enables higher spending (C)
which encourages spending (C).
iv. Financial stability. If there is financial stability and banks are willing to lend, then firms
will be more willing to invest and investment will increase aggregate demand.
An increase in aggregate supply (productive capacity)
This requires an increase in the long-run aggregate supply (productive capacity) as well as AD.

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Aggregate supply or potential growth can increase for the following reasons:

i. Increased capital, for example investment in new factories or investment in

infrastructure, such as roads and telephones.
ii. Increase in labour productivity, through better education and training or improved
technology
iii. Discovering new raw materials, for example, finding oil reserves will increase national
output
iv. Technological improvements, to improve the productivity of capital and labour e.g.
Microcomputers and the internet have both contributed to increased economic growth. In
the future, economic growth may come from new technology such as Artificial
intelligence (AI) which enables robots to take the place of human workers.
C) Development theories have to deal with two challenges. On one hand, development theories
analysis the social economic phenomena of underdevelopment and development. On the other
hand, they should base on problem analysis and offer strategies for development opportunities.
The focus of this different approaches is on economic, social, political or cultural factors. In
some measure this approach overlap. The following are the two theories of economic growth and
development;

Neo-Classical model of Solow/Swan

Neoclassical growth theory is an economic theory that outlines how a steady economic growth
rate results from a combination of three driving forces: labor, capital, and technology. The
National Bureau of Economic Research names Robert Solow and Trevor Swan as having the
credit of developing and introducing the model of long-run economic growth in 1956. The model
first considered exogenous population increases to set the growth rate but, in 1957, Solow
incorporated technology change into the model.

To increase the rate of economic growth in the Solow/Swan model we need:

i. An increase in proportion of GDP that is invested however, this is limited as higher

proportion of investment leads to diminishing returns and convergence on the steady state
of growth

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 ii. Technological progress which increases productivity of capital/labor
iii. It suggests poor countries who invest more should see their economic growth converge
with richer countries.

Criticisms of this neo-classical (Exogenous model)

i. It does not explain why countries have different levels of investment as % of GDP
ii. Some developing countries don’t attract higher levels of investment because of structural
problems such as corruption, lack of infrastructure.
iii. It does not explain how to improve rates of technological progress.

Modernization theory.

These theory used to explain the process of modernization that a nation goes through as it
transitions from a traditional society to a modern one. The theory has not been attributed to any
one person; instead, its development has been linked to American social scientists in the 1950s.
This lesson will discuss the opposing views of the Marxist and capitalist versions, during the
Cold War era (1947-1991), two versions of modernization theory were prominent.

Marxist

The Marxist theory of modernization theorized that as nations developed, adopting a communist
approach to governing, such as eradicating private property, would end conflict, exploitation, and
inequality. Economic development and social change would lead developing nations to develop
into a society much like that of the Soviet Union.

Capitalist

The capitalist version of modernization theorized that as nations developed, economic

development and social change would lead to democracy. Many modernization theorists of the
time, such as W. W. Rostow, argued that when societies transitioned from traditional societies to
modern societies, they would follow a similar path. They further theorized that each developing
country could be placed into a category or stage of development. Rostow's stages of development
are:

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 i. Traditional - an agricultural-based society
ii. Pre-conditions for take-off - characterized by an abundance of entrepreneurial activity
iii. Take-off - a period of rapid economic growth
iv. Maturation - economic development slows to a more consistent rate
v. Mass production or mass consumption - a period in which real income increases

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REFERENCE

Aghion, P. & Howitt, P.W. (1992). “A model of growth through creative destruction”
and Comparative Development,” American Economic Journal: Macroeconomics,
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Baten Joerg & Jan Zanden, (2008). “Book production and the onset of modern economic
growth,”
Cervellati, Matteo & Uwe Sunde, (2006) “The Economic and Demographic Transition,
Mortality,
Clark, G. (2005). “The Interest Rate in the Very Long Run: Institutions, Preferences and
Modern
Econometrica 60, 323-351.
forthcoming
Growth,” Working Paper, UC-Davis.
Journal of Economic Growth, Springer, vol. 13(3), pages 217-235
Koopmans, T.C. (1965). "On the concept of optimal economic growth. In: The Economic
Maddison, A. (2003). “The World Economy”. Historical Statistics. Paris, OECD. Maddison,