Growth and Development

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and  Technological advances that boost productivity.  Improvements in the quality of resources.What is growth? Economic growth is the increase of a nation’s real output (GDP).  Results from:  Greater quantities of natural resources. and capital.  2 . human resources.

 The economic standard of living is often defined as GDP per capita.Development Economic development is the process by which a nation enhances its standard of living over time.  3 .

Growth and Development Models Harrod and Doman—Keynesian Growth  Solow—Neoclassical growth  Schumpeter—economic development and institutional change  Nurkse. Lewis. Schultz—theories of economic development  4 .

Sir Roy Harrod and Evsey Domar     Sir Roy F. Johns Hopkins and MIT Harrod viewed himself as more of a specialist on the int’l monetary system. Harrod (1900-1978).). University of London Evsey Domar (1914. 5 . “An Essay in Dynamic Theory” (1939). Economic Journal.

 The rate of growth of the capital stock (“the warranted rate of growth”) is defined as the ratio of two constants:   Saving and investment per unit of desired output Stock of capital per unit of output dictated by technology.Harrod’s Ideas  Based on two hypotheses:   Capital and labor have to combine in a fixed proportion dictated by current technology to produce product.    The rate of growth of labor is called the “natural rate of growth” Society is fully utilizing the capital and labor only if the “warranted” and the “natural” rates of growth happen to be equal. This is the “knife edge” problem. 6 . If investment is above the warranted rate. If investment is below. The saving rate is fixed. recession follows. inflation follows.

Change in AD is proportional to the change in investment. The productivity of investment is constant. 7 . “Balanced growth” is a rate of income growth which maintains full employment of all resources.    Net investment adds to the capital stock. Assumes:   Fixed saving rate. but investment spending must increase from period to period if the potential income arising from increased capital is to be realized. Investment spending also adds to aggregate demand. To achieve balanced growth. increasing potential GDP. investment must increase at a rate equal to the product of the potential average productivity of investment and the propensity to save.Domar’s Ideas   “Essay’s in the Theory of Economic Growth” (1957).

Nobel prize in 1987. Solow’s theory on growth supports the neoclassical view that the economy naturally adjusts to achieve stable equilibrium growth. Harvard.Robert M. Career at MIT. Solow (1924. 8 . Contributions across the breadth of economics.)     PhD.

Economic Doctrine and Method 1939. Business Cycles 1942. The Nature and Essence of Theoretical Economics 1911. and Democracy 1954.Joseph Schumpeter (1883-1950)        Background 1908. Capitalism. History of Economic Analysis (published posthumously) 9 . The Theory of Economic Development 1914. Socialism.

The balanced. circular flow is disrupted.Schumpeter (2)      Starts with neoclassical model. Breaks down economic development three cycles:    Kitchin Cycles (40 months) Kuznet’s Cycles (10 years) Kondratieff Waves (35-55 years) 10 . Innovations occur in clusters. Introduces entrepreneurship and innovation— change. Innovations drive business cycles and development. then recovery. Innovation is followed by recession and depression.

11 .Schumpeter (3)      Argues that capitalism will not survive. rational mindset of capitalism is destructive of moral authority Economic issues move to political sphere Welfare state expands and takes over—guided capitalism to state capitalism. Obsolescence of entrepreneurial function Collapse of Political Strata Institutions crumble    The cold. Rejects Ricardian and Socialist arguments for the decline of capitalism. etc.

and help to explain the productivity advantages of developed nations. Nobel Prize. 1979. Initiated the “human capital” revolution in economic thought. as well as agricultural economics.Theodore Schultz (1902-1998)    Background and accomplishments. 12 . Cited his work in growth and development.  Knowledge and skill are the result of investment.

To develop economies. but rather include human capital formation. 13 . Income has risen faster than the combined amount of factors. How? Ans: better quality of factors. The problem is that we are not including the entire stock of capital. we should not focus solely on physical capital formation.Schultz (2)  Human capital helps to explain three things:    We thought that K/L ratios should rise with growth. That is. but in fact they fall. there appears to be increasing returns to scale.

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