ECONOMIC DEVELOPMENT

PROF. STEPHEN C. ESCARTIN J.D, LPT

3.3.1 KEYNESIAN GROWTH THEORY AND
HAROLD-DOMAR MODEL

Y – income
C- consumption
S-saving
I-investment
T-time
3.3.1 KEYNESIAN GROWTH THEORY AND
HAROLD-DOMAR MODELweakness:

The main weakness of the Harold-Domar model is that it

still incorporates the restrictive assumption about
constant returns to scale and the constancy of the saving
rrate rate.

In addition, the extended model fails to consider that the

population growth may be endogenous, depending on the
stage of economic development.
3.3.2 Solow (Neoclassical) Model

This model assumes the endogeneity of the

capital-output ratio. ---that is the output of
economy depends crucially on its initial
endowments of labor and capital, and that these
factors work in tandem to produce the economy’s
level of output.
Use whiteboard
Use white board
Important inferences from solow model

From the foregoing, it follows that the economy moves to

a steady level of per-capita capital stock regardless of
initial conditions. Note that in the 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.
3.3.3 POWER BALANCE THEORY

This theory, which were popular when North-South were

being stressed, were based on the assumption that the
poor “southern” economies were being exploited by the
rich industrial “northern” countries.
3.3.3 POWER BALANCE THEORY

In these models, the poor countries export raw materials to the

industrial countries in exchange for industrial goods. Because the
terms of trade tend to deteriorate overtime, the power balance
theories assert that the poor countries have to export more and
more raw materials in order to keep from slipping backward. Hence
as a result, their development is retarded.
Assumption

These theories assume that when incomes are low, these

countries will not be able to save much.
3.3.4 Structuralist Approach

Economic growth as a process of shifts in resources among sectors.

It stresses rigidities that hinder this shift in resources and it studies

how the shift in output among different sectors take place overtime
as development progresses. In particular among among industrial
countries and developing countries.
3.3.4 Structuralist Approach

This process involves aa decline in agriculture’s

contribution to GDP, an increase in industrial output up to
a point when it too begins to decline, and finally an
increase in the component of services income as a share of
GDP, which has not yet begun to decline.
Table 3.1
3.3.5 NEW GROWTH THEORY

It attempts to endogenize technical change by using

external economies and spillovers. These operate on the
basis of beneficial effects which new technology and
higher levels of education have on other sectors of the
economy.
Aspects of Human Capital In the New Growth
Theory

Using Cobb-Douglas production function.