ECONDEV DEPTALS 1
2. All available factors of production
INTRODUCTION TO ECONOMIC
DEVELOPMENT
- Economic Development & Other Aspects
of Economics
- Measuring Growth and Development
- New Approaches to Measuring Economic
Development
- Country Comparisons
Economy and Scarcity
- Scarcity is often described as limited,
inadequate, insufficient, and meager.
- Economic resources or factors of
production (e.g. land, labor, capital, and
entrepreneur) are scarce, and these are the
basis of producing products (goods and
services).
- These factors of production are scarce and
there is not enough supply to produce the
products that we need and want.
- Even though there is efficiency in the use of
these factors of production and with the
fullest use of the advancement in
technology, there is a limit to our current
production.
- Scarcity will compel producers to choose
among competing uses of factors of
production.
- We are faced with another problem, and
this is the question of what to produce?
How to produce?For whom to produce?
- What to produce and how to distribute this
output to society are the most basic
choices to be made.
- Production possibilities frontier (PPF) is a
concept that can easily resolve this
problem.
- PPF is a boundary showing the
combination of two products that can be
efficiently produced by using the given
resources.
- PPF is illustrated by the following concepts,
due to the complicated structure of the
economy, we try to simplify by making
certain assumptions. In examining PPF,
these assumptions are important, and these
are:
1. All available factors of production
(economic resources) are fully used;
(economic resources) are efficiently used;
3. There is a constant quantity and quality of
these factors of production in a specific
period of time;
4. Technology is constant as well; and
5. Two products are produced with our factors
of production and technology.
- A number of important concepts are
illustrated in the PPF. The fundamental
concept is that there is a limit to what we
can produce.
- A fundamental idea in the PPF is when we
try to produce more of a good we must give
up producing the other good as given by
the concept of opportunity cost.
- Opportunity cost is a foregone opportunity
by not choosing the next best alternative.
- This opportunity cost can take any variable
such as products and money. And in our
illustration, guns are the products that
society has to give up to produce more
butter. As economists are fond of saying,
there is no such thing as a free lunch! There
is an opportunity cost to everything.
- Because opportunity cost arises, trade –
offs happen. This is defined as one more
good thing that can be obtained only by
giving up something.
- The second concept manifested in the PPF
is unemployment. Realizing the different
combinations of two products represent
possible quantities. We have assumed the
full use of our resources, skills, knowledge,
and technology, hence, the phrase
production possibilities.
- In reality, we rarely produce to our full
potential, some economic resources may
be unused such as factories, machines,
and ultimately our workers who are laid off.
- If this is the case, we are working not on
the curve itself, but below the curve
- We could do much if we are working on the
curve itself.
- If there is an outward movement in our PPF,
this involves a rise in economic growth.
- Economic growth is an outward movement
in the PPF brought about by a rise in
technology.
- Services are indispensable products that
we have. And our examples of these are:
 Health care, education, road and bridge
repairs, etc.
- We cannot graph these infinite
combinations, however, we can redefine
our axes as staple goods for the y – axis,
and luxury goods in our x – axis.
- We can also divide our economy’s output
into agricultural goods and manufactured
goods (consumer goods and capital
goods).
- We can also examine the choice between
military and civilian goods, and private and
public goods. There are many options
involved in the production of various types
of output.
Economics and Distribution
- Production choices are very important, but
they tell us half of the story. The choices of
distribution are as important as the choices
for the products.
- In our present circumstance, the
distribution of the vaccine for covid – 19 is
as imperative as the discovery of the
vaccine.
- Pharmaceutical companies such as Pfizer
need to enter into a contract with various
governments. For the Philippines, the local
government units (LGU’s) need storage
facilities that require ultra cold storage
facilities.
- And because the country is made up of
islands, the geographical location is another
type of disadvantage.
- To promote the use of vaccines, there
should be consumer confidence to properly
use the vaccine.
Demand and Supply
- The theoretical concept of demand and
supply was provided to you in the course of
managerial economics.
Efficiency and Equity
- Understanding demand and supply
provides better insight into the working of
the market economy and its PPF, because
demand and supply determines how much
to be produced for the product. And high
prices create thriftiness.
- Prices of the products create efficient
means of allocation and distribution.
- Equity is a value – laden concept. Fairness
is what it means.
- But certain results of the market may not
seem fair to some of us.
Market failures and Glimpse of the Future
- The market performs useful functions. In
addition to efficiency a market – based
economy gives economic incentives and
tends to be highly productive.
- Despite this, the market can also fail, the
existence of many market failures does not
imply that the market we work in is in itself
a failure.
- This is the reason why the government is
involved in the market to assure that the
needs of the society are met. And some of
this are the following:
1. Public Goods and Services;
2. Spillovers;
3. Inequity;
4. Market power;
5. Instability
● Greater emphasis was given in this area of
economic development during the postwar
era and it continued in the new millennium.
● The “economic miracle” that spanned for
several decades followed by a severe
financial and economic crisis. Poverty and
economic inequality remained even with
better
● East Asian miracle, a showcase of
development up until the Asian crisis.
● Asian crisis created a number of questions
about the continued viability of a rapid
growth profile for the region.
● Economies have begun to rebound.
Economic Development in Asia
- Social impact of the crisis has been
substantial.
- Future development will depend upon many
factors, including public policy and
developments in industrial countries.
- This course looks at both the history and
the future outlook for the region.
Difference between development economics and
other branches of economics
- In economic development, we used the
analytical tools and methods developed in
other branches of economics such as
growth theory, macroeconomics,
microeconomics, labor economics, fiscal
and monetary policies just to name a few.
 - These tools of analysis are applied to
problems and challenges of developing
countries.
Is Economic Development Synonymous to
Economic Growth?
Economic Growth Without Development
- It is possible to have economic growth
without development. i.e. an increase in
GDP, but most people don’t see any actual
improvements in living standards.
1. Economic growth may only benefit a small
% of the population. For example, if a
country produces more oil, it will see an
increase in GDP. However, it is possible,
that this oil is only owned by one firm, and
therefore, the average worker doesn’t really
benefit
2. Corruption. A country may see higher GDP,
but the benefits of growth may be siphoned
into the bank accounts of politicians.
3. Environmental problems. Producing toxic
chemicals will lead to an increase in real
GDP. However, without proper regulation, it
can also lead to environmental and health
problems. This is an example of where
growth leads to a decline in living standards
for many.
4. Congestion. Economic growth can cause
an increase in congestion. This means
people will spend longer time in traffic jams.
GDP may increase but they have lower
living standards because they spend more
time in traffic jams.
5. Production not consumed. If a state-owned
industry increases output, this is reflected in
an increase in GDP. However, if the output
is not used by anyone then it causes no
actual increase in living standards. Military
spending. A country may increase GDP by
spending more on military goods. However,
if this is at the expense of health care and
education it can lead to lower living
standards.
Measuring Growth & Development
- For some time, economic development was
considered to be synonymous with
economic growth.
- However, these two concepts namely
economic growth and economic
development are not necessarily the same.
The concept of economic development is
broader and much more encompassing
than economic growth.
- Use of GDP and GNI and exchange rate
comparisons lead to patterns of growth
over time.
- Other methods such as purchasing power
parity can also be used to compare
standards of living.
Other Measures
- Human development index (HDI)
- Healthy life expectancy
- Green GNP
Human Development Index
- According to the United Nations
Development Programme (UNDP) The
Human Development Index (HDI) is a
summary measure of achievements in three
key dimensions of human development: a
long and healthy life, access to knowledge,
and a decent standard of living. The HDI is
the geometric mean of normalized indices
for each of the three dimensions.
- The health dimension is assessed by life
expectancy at birth, the education
dimension is measured by mean of years of
schooling for adults aged 25 years and
more and expected years of schooling for
children of school entering age. The
standard of living dimension is measured by
gross national income per capita. The HDI
uses the logarithm of income, to reflect the
diminishing importance of income with
increasing GNI. The scores for the 3 HDI
 dimension indices are then aggregated into
a composite index using geometric mean.
- HDI is the ratio of a particular country to the
most developed country.
- HDI is the ratio is Between 0 and 1.
Healthy life expectancy
- According to World Health Organization
(WHO) Healthy life Expectancy is defined by
the following:
- It summarizes the expected number of
years to be lived in full health. The years of
ill – health are weighted according to
severity and subtracted from the overall life
expectancy rate to give the equivalent years
of healthy life.
GREEN GDP
- National income measures that considers
depletion of natural resources (renewable
and non-renewable) and environmental
degradation.
- One of the more recent approaches
developed to address the inherent
shortcomings of GDP and GNI as growth
and development measures is based on
what is known as the ”green” system of
national accounting.
- It includes renewable and non – renewable
natural resources, and environmental
degradation.
- Other suggestions to impose “defensive”
expenditures for the environmental
protection and compensation for
environmental damage should be
deducted.
Making Comparison Between Countries
1. Exchange Rate Method:
- The Philippine peso is compared with a
foreign currency. The value of the GDP and
GNI per capita would then be valued
accordingly.
- USD$-Php 52
- GDP is expressed In terms of USD$
2. Purchasing Power parity (PPP) Method:
- PPP is defined as the number of units of
the country’s currency required to buy the
same amount of products that an American
dollar would buy in the U.S.
- Develops cost index for comparable
baskets of consumption goods in the local
currency and then compares them with
prices in the US for the same set of
commodities.
Chapter 2 – Growth and the Asian Experience
Theory of Economic Growth
- Traditionally labor and capital were
introduced as the only variables
determining the level and the growth of
output. Y = f (K,L).
- Land was assumed to be included within
the capital.
- Other factors were not considered until it
was noted by Solow that there was a large
residual factor that was unexplained.
- Substantial time has been spent explaining
this residual.
- This residual has been called total factor
productivity (TFP) or sometimes multifactor
productivity.
- TFP is very large in industrial countries,
explaining as much or more than 50
percent of economic growth in the postwar
era.
Total Factor Productivity
- Question: What factors are contained in the
residual? Y = f (K, L, A)
- Such a list might include:
- the adoption of new technology,
- better educated workers,
- better management,
- better coordination within the organization,
- more efficient production techniques,
- better inventory management,
- better and cheaper distribution and
marketing skills and organization.
Testing Different Growth Theories
- Many different approaches have been
devised to test these alternatives. In doing
 this, it is useful to distinguish between
embodied and disembodied technical
progress (TFP).
- Embodied TFP can be measured by
adjusting the factor inputs of labor and
capital. Disembodied TFP cannot – it has to
go into the residual.
Growth Theories
The Harrod-Domar Model
- Dynamic version of a simple Keynesian
model.
- Growth is dependant on the rate of capital
formation and the efficiency of the use of
capital (capital/output ratio).
- Population growth can be added and it
reduces the rate of growth ceteris paribus.
The Solow Model
- It introduces diminishing returns to capital
and focuses on the long run.
- Convergence to a steady state level of per
capita income occurs despite differences in
initial conditions.
- Total income grows at the same rate as the
population.
- The higher the rate of saving, the higher the
steady state level of per capita income.
- When we add technical progress to the
Solow model in the form of more efficient
workers, then we have growth in per capita
income at the same rate as the rate of
growth in worker efficiency.
- There is still a steady state but it now
relates to efficiency units of capital.
Power Balance Theory
- Emphasized exploitation of poor “southern”
economies by the rich industrial “northern”
economies.
- Deterioration of terms of trade of
agricultural products in poor economies
further aggravates the situation.
- The theory has generally been discredited.
Structuralist Approach
- The structural approach was developed in
the 1960s and 1970s by Hollis Chenery.
Chenery was initially trained as an engineer
and this approach reflects his training.
- Structural approaches stress the shift in
output among the sectors of the economy
and the rigidities that hinder them.
- A shifting balance between the three major
sectors of the economy – agriculture,
industry and services.
- Agriculture diminishes over time and
industry increases. Productivity is higher in
industry so higher growth depends upon
this shift.
- A stereotypical pattern of economic growth
which has been observed in many
countries.
- Initially, agriculture has a large share of
output when the economy is at a low level
of development. Share of industry and
services are small.
- As industrialization takes place, the share of
agriculture declines and that of industry and
services grow.
Two Sector Model of Growth
- The Lewis-Fei-Ranis model (LFR), named
after the three economists that developed
it, is a two sector model – a modern and a
traditional sector.
- Resources move from the traditional to the
modern sector and this spurs growth. More
on this in chapters 4 and 5.
- The beauty of the LFR model is that it
describes many of the characteristics of the
Asian economies when they were just
beginning on the path to rapid development
in the 1960s and 1970s.
- That is why it has become so popular
among development economists studying
Asia.
Solow Growth Model
- This fundamental Solow equation says that
the amount of per capita capital in the
current period depends upon the per capita
capital in the last period, the saving rate in
the previous period and the rate of
population growth.
- From the foregoing, it follows that as the
economy moves to a steady state level of
 per capita capital stock regardless of initial
conditions.
- In the steady state, there is no deepening of
capital and the amount of capital per capita
remains unchanged from period to period
as does the level of per capita income. That
is, there is no long run growth in per capita
income.
- Total income growth rate n is thus assumed
to be the same as the rate of growth for
population
- Further, in the Solow model framework, the
saving rate has no effect on the long run
growth rate of per capita output which is
zero.
- However the saving rate does affect the
equilibrium level of per capita income.
- The higher the saving rate, the higher the
steady state level of per capita income.
New Growth Theories
- New growth theories that go beyond Solow
have been developed in the past decade.
- They stress the importance of externalities
and the possibility of increasing returns to
scale rather than the decreasing returns to
scale of the Solow model.
- The key to this is human capital formation.
- Higher per capita incomes tend to slow
growth because of diminishing returns but
higher endowments of human capital tend
to speed up growth.
- Returns to such investments may be
increasing.
The Asian Growth Miracle
- For the last forty years, a group of countries
in East and Southeast Asia have grown at
remarkably high rates.
- Japan led the way, beginning right after
World War II.
- It was joined by Thailand, Taiwan, Korea,
Singapore and Korea in the 1960s.
- Southeast Asia followed in the 1970s.
- Although individual experiences vary, South
Asia did not generally begin to grow more
rapidly until the late 1980s and early 1990s,
when government policy shifted toward
supporting a more open and competitive
environment.
Policy Environment Before the Transition to Rapid
Growth
- The policy environment in most developing
countries throughout the world stressed
import substitution policies for industry.
- The theory was that developing countries
had a comparative advantage in primary
products and so they should export these
products.
- The import substitution theory also argued
that since incomes were low, savings rates
were also low. Inflows of investment and
financial aid were needed to lift growth.
- To minimize on foreign exchange outflows,
industries that substituted for some imports
were promoted by government policy.
- Such a strategy, which was followed for
several decades after World War II in many
developing countries, simply perpetuated
the cycle of North-South trade and
reinforced protectionist policies that
contributed to a lack of competition and
economic inefficiency.
Policy Environment
- What Japan and later the countries of East
Asia did was to begin to develop an
environment that stressed outward looking
trade policies and the acquisition of foreign
technology.
- In the case of Japan, many believe it was
an attempt to develop a mercantilist
strategy to help it recover its influence after
the defeat in World War II.
The Asian Growth Miracle
- Primary factors:
- Openness
- Macroeconomic Stability
- Labor Market Flexibility
- Education Policies
- Secondary factors::
- Initial Conditions
- Sector Policies
Primary Factors-Openness
- The first factor in the primary strategy was
outward looking policies and emphasis on
exports and acquisition of foreign
technology.
- First, some industrial capability was built up
by focusing on import substitution in
industries with ties to agriculture - footwear,
food processing and textiles.
- Second, after some years, industrial policy
shifted to promoting external markets.
 - Initially, this focused on extending the
scope of the industries that were producing
for the domestic markets such as textiles
and apparel, leather products and footwear
and food processing.
- In Southeast Asia, the focus was also put
on rubber, sugar, coconut and palm oil
products as well as some specialized textile
products such as silk.
- Slowly the emphasis shifted toward labor
intensive industries that were not
necessarily tied to the agricultural base
such as electronics assembly and apparel.
- The shift from import substitution to export
promotion was led by a shift in the trade
regime so that there were lower tariff rates
on exports and imports (see Table 2.3).
- Non-tariff barriers, including bureaucratic
procedures and graft/corruption as well as
import bans on some items, were also
reduced.
- Transformation to labor intensive export
oriented industry was supported by flow of
foreign direct investment – initially from
Japan and the US, particularly in Korea,
Taiwan and the Philippines.
- Later the volume increased and more flows
began coming in from Europe.
- A virtuous cycle of growth was created by
this shift in emphasis from import
substitution to export promotion (see Tables
2.4 and 2.5).
- In South Asia, on the other hand, the shift
occurred much more slowly.
- Technological transfer served to reinforce
the shift in export emphasis.
- Foreign technology acquired by buying
from foreign companies under license.
- By copying it without license – sometimes
legally and sometimes not.
- By entering into joint ventures (FDI).
- East Asia (Korea, Japan, Taiwan) by and
large followed the first route while
Southeast Asia followed the second.
- The flow of FDI increased following the
Plaza accord in 1985 when the yen
appreciated and Japan began to move
some of its labor intensive industries
offshore.
Primary Factors-Macroeconomic Stability
- The second set of primary factors focused
on the importance of macroeconomic
policies and the role of the government.
- Governments generally followed polices
that created and supported a competitive
environment for export oriented industries
but not necessarily for the domestic
market. Japan is a good example of the
latter.
- The amount of government intervention
didn’t seem to have a direct effect on
performance.
- There was a lot of government intervention
in the industrial and financial sectors in
some countries and little in others.
- In Korea, Japan and Singapore, there was a
lot while there was less in Malaysia and
Taiwan.
- In Hong Kong and Thailand, on the other
hand, there was virtually no intervention.
- What was important was the efficiency and
incorruptibility of the bureaucracy.
- In the Philippines and Sri Lanka, policy
environments were similar to those in the
successful countries but growth was
slowed by other factors such as corruption,
lack of political will, corruption and
domestic unrest.
- The efficiency of government as well as
policies followed were important. Taiwan
and Singapore are good examples.
- Efficient governments are characterized by
little rent seeking, salaries are competitive
and promotions are based on performance
not on seniority, patronage or crony
connections.
- Some policies such as financial repression
and directed government lending programs
were wasteful.
- But the flow of resources for investment
were substantial and the wastefulness and
distortions created by these policies didn’t
surface until the 1990s bubble broke.
Primary Factors-Education and Labor Productivity
- The third set of primary factors focused on
education and labor productivity.
- As stressed by the new growth theories,
education played a critical role in both the
transition to an export led growth strategy
and to the ability to sustain it (see Tables
2.8 and 2.9).
 - By 2000, some of the educational
advantages of Asia had began to erode.
- There were two reasons for this:
- diminishing returns since more
resources had to be devoted to
secondary and tertiary education.
- rapid rate of income growth that
tended to outstrip the corresponding
growth in human development.
- Behrman and Schneider conclude that
schooling attainment in miraculous
economies was not particularly
outstanding.
- The conclusion is that labor market
flexibility has to be considered along with
education.
- The miracles economies did not have
strong unions until recently (Korea) and
weak minimum wage legislation.
- ILO rates the miracle economies as among
those with the most flexible labor markets.
- Mobility from rural to urban is also high.
Secondary Factors-Differences in Initial Conditions
- Initial conditions played a part in the
success of the miracle conditions.
- Land, income and wealth distribution in the
miracle economies were generally more
even than in other countries and regions.
- Average educational attainment was high at
the beginning of the high growth period.
Secondary Factors-Sector Policy
- Sector policies were influential to the
growth of the miracle economies.
- Agricultural sector policies were not
particularly onerous. There were taxes on
agriculture but sector was still viable as we
will see in Chapter 4.
- Industrial policies were benign and
competition flourished in most countries.
- In Korea and Taiwan, “infant industry”
protection policies were strictly enforced
and favored export industries were
monitored for efficiency and export
performance. Subsidies were withdrawn if
performance was below expectations.
-
- There is considerable debate about whether
industrial policy in these two countries was
beneficial or not.
-
- Whatever the outcome of these
discussions, it is a fact that growth was
rapid in both countries.
Aspects of Economic Performance
- High levels and growth rates of savings and
investment in miracle economies.
- Both of these variables increased
dramatically as a percent of income (see
Tables 2.6 and 2.10).
- Furthermore, the saving-investment gap
was small or even negative for some
countries (see Table 2.11).
- Increased productivity in miracle
economies.
- Measures of TFP show a modest
contribution to output growth until the
middle of the 1980 and an acceleration
afterwards.
- The latter is the combined result of previous
transfer of technology and more rapid FDI
following the Plaza accord.
Convergence of Income
- Question: The Solow model tells us that
incomes will converge to a steady state
irrespective of where they started out.
- This assumes that the technical progress
coefficient, , remains constant across all
countries.
- Is this a realistic inference?
- To test this hypothesis of absolute
convergence, we can see if there is a
relationship between per capita income in
an initial period and the growth in income in
successive periods.
- Using logs to denote growth we have, for
the period 1960 to 1990,
- Tests of this model for several sets of
countries shows that it doesn’t hold for a
heterogeneous group of countries around
the world.
- It does hold for OECD countries and for
OECD and Asian countries together.
- It does not hold for developing countries in
general.
- A less restrictive form of convergence is
called conditional convergence.
- In this form of the model, we allow the
various parameters of the growth equations
to change between different countries or
groups of countries
 - There would still be a convergence in
growth rates of income but the level of
income in the steady state would differ.
- This level would depend upon saving rates,
population growth rates and depreciation
rates of capital.
- Tests of this model show that there is still a
lot of unexplained variation in per capita
income, although variations in population
growth rates and saving rates did explain
about half of the variation in per capita
income across countries.
- However these results imply that the rate of
convergence is very slow.
- What is likely is that a number of other
factors are involved aside from the saving
and population growth rates, such as the
spread of technology and the role of
education.
- We return to these issues later.
Convergence
- There is evidence that there is convergence
within groups of countries with similar
geographic and economic similarities such
as the European Union or countries in East
Asia.
- However there is less evidence that there is
convergence between rich and poor
countries
- For example globally there is strong
evidence for divergence.
- Rich countries get richer and poor countries
get poorer.
- This does not hold within countries
although the convergence is slow.
- German states and Japaneses prefectures
and states of the US are converging.
Other ppt: Growth Rate of Income and
Efficiency
Components of Income and Output
- Output is derived by combining factors of
production which include land, labor, and
capital.
- The two variable inputs which are
combined in a standard production
function.
- The production function is a useful tool for
analyzing the process of economic growth.
A production function relates the inputs of
the production process, such as labor (L)
and capital (K), to the output/ income (Y)
from the process.
- Y = f (K,L)
Two kinds of technical progress:
1. Embodied technical progress
- has something to do with the changing
nature of the inputs into the production
process;
- these would include:
- highly educated workers,
- more highly skilled and
computer-literate
- Innovation and invention
2. Disembodied technical progress
- relates to the way factors are combined
together in the workplace, such as
management or organizational innovations
(computer technology, internet and the
flexibility of production process has
increased).
- Ex: disembodied technical progress
- lean manufacturing
- Warehousing management system
- inventory management system
Total factor Productivity (TFP)/ Multifactor
Productivity
- Efficiency gains can be due to a number of
factors including:
- greater economies of scale,
- better management,
- marketing or organizational abilities,
- shifts in production from low productivity
activities with the same amount of labor
and capital
- or the impact of new technology which
enables greater output to be obtained with
the same capital and labor inputs.
- TFP and MFP in the production function are
denoted as A, while, Capital and Labor by
K and L.
 - new methods of organizing the way
products are assembled, organizational
structure and labor-force.
● In Asia, much of the dynamic efficiency
resulted from a shift from the less efficient
agricultural sector to a more efficient
industry;
● Dynamic efficiency can also result from new
innovation and inventions which boost total
factor productivity (TFP).
Growth Theories
Keynesian-Harrod-Domar Model

ECONOMIC EFFICIENCY
- Production Possibilities Frontier and
Technical Progress (A)
- The production possibility frontier (PPF) is a
curve depicting the best possible
combination of goods that is produced in
an economy.
ECONOMIC EFFICIENCY: PPC AND TECHNICAL
PROGRESS:
- Economic efficiency is boosted in a static
sense, if firms move from inside the
production possibility frontier, say point E,
toward the frontier itself to point E.
- Dynamic efficiency takes place when there
is economic growth and the scale of
production increases.
- Production shifts from a low productivity
sector to a more productive sector which
boost total factor productivity.
- In figure 2.1b, this is represented by an
outward shift of the PPF curve (dotted line)
Improvement in economic efficiency can take place
in a number of ways:
- including the move toward best practice
through better management and
organization; = 3:1
- implementing better inventory-control
measures,
- better relations between management and
labor,

Solow (Neoclassical) Model
- Find the Steady State of Equilibrium of
capita-labor or k assuming that
- Depreciation is 0.05 and a savings rate of
0.10.
- Step 1: Solve for K.
- Step 2: Solve for SSE for Y.
- Step 3: Find SSE for Consumption C.
- Step 4: Find SSE for Investment i.
- Step 5: Double check with closed
economy equation Y= C + i.
Structuralist Approach
- Models economic growth as a process of
shifts in resources.
- Stresses rigidities that hinder this shift and
studies how the shift in output among
sectors takes place over time as
development progresses.
- Shows the shifts in resources from
agriculture to industrial output and
services.
Lewis-Fei-Ranis Model
- Explains how the process of
industrialization takes place and how
inefficiencies can arise.
- Traditional sector : Low capital
accumulation & low labor skill ; Low
productivity and low earnings
- Modern Sector : High Productivity ; Pays
Higher
Power Balance Theory
- Popular in North-South.
- Southern economies were exploited by
Northern economies.
- Poor countries exported raw materials to
industrial countries in exchange for
industrial goods.
- Terms of trade i.e., Price of raw materials in
relation to price of manufactured goods
tends to deteriorate.
- Developed by younger economists,
dissatisfied with the Solow-Swan model.
- Attempts to endogenize technical change
by using external economies and spillovers.
- Effects of technology and education can
help generate increasing returns to scale
and drives growth process to higher levels
of income instead of slowing growth
through diminishing returns.
- One important feature of this growth theory
is the mechanism by which technology is
transferred from one firm to another in an
 industry within the country, and then across
international borders.
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