KALDOR’S MODEL OF GROWTH

INTRODUCTION
• KALDOR’S MODEL follows Harrodian approach and the
Keynesian techniques of analysis.
• Some other neo classical models treat the causation of technical
progress as completely exogenous.
• But Kaldor attempts to provide a framework for relating the genesis of
technical progress to capital accumulation.
Assumptions
1. Short period supply of aggregate goods and services is inelastic and
irresponsive to any increase in the monetary demand.

2. Technical progress depends on the rate of capital accumulation.

 Cont…
3). Income consists of wages and profits
where
wages comprise salaries and earnings of manual labour,

profits comprise incomes of entrepreneurs/ property owners.

4).Total savings consists of savings out of wages and savings out of

profits.
 Cont…
5).Share of profits in total income is a function of investment, given the
propensity to save out of profits.

6).All macro-economic concepts of income, wages, profit, capital,

saving and investment used in the model are expressed at a constant
rate.
 Cont…
7).Investment of any period partly a function of the change in output
and partly of the change in the rate of profit on capital in the previous
period.

8).Monetary policy plays a passive role in money wages that may be

rising faster than productivity or money wages may be constant.
 Cont…
9).No effects of a change in the share of profits and wages, and of a
change in interest rates on the choice of techniques adopted.

10).The choice of techniques is assumed to alter with the accumulation

of capital and the progress of techniques in the capital goods making
industries.
This model operates under two stages
a) Constant working population
b) Expanding population

• Proportionate growth • Proportionate change in

rate of total real income
will be the same as the
proportionate growth
rate of output per head.
total real income is the
sum of the proportionate
change in output per
head and the
proportionate change in
total working population.
A Constant working population
Savings function
St = π Pt + β (Yt-Pt) ; 1 > π > β ≥ 0
St = Savings
π Pt = Savings out of profits
β (Yt-Pt) = Savings out of wages in period t.
Investment function
Kt = π’ Yt-1 + β’ (Pt-1/Kt-1) Yt-1
It = Kt+1 – Kt ; π’ > 0 and β’> 0
Kt =Stock of capital at time t
Yt-1 =Output of the previous period
Pt-1/Kt-1 =Rate of profit on capital
Yt-1 =Output of the previous period
It =Investment in period t
Kt+1 =Stock of capital in the next period
Kt =Stock of capital in the current period
Technical progress function
Yt+1-Yt / Yt = π’’ + β’’ It/ Kt
π’’ >0 and 1> β’’ >0

The rate of growth of income is an increasing function of the rate of

net investment expressed as the proportion of the stock of the capital
in period t, multiplied by the capital per head (β’’) plus the coefficient
of technical progress (π’’)
 Cont..
The steady growth path depends on the technical dynamism of the
economy. i.e., on the technical progress function as given by the
following condition.

G= π’’ / 1-β’’

Point G as determined by the technical function TT’ and the 45 0 line is

one of steady growth where the proportionate growth of income equals
the proportionate growth of capital.
B Expanding population
Starting from Malthusian contention he assumes that

• For any given fertility rate, the percentage rate of growth in population
cannot exceed a certain minimum however real income is rising

• The rate of population growth will rise moderately as a function of the

rate of growth of income over some interval of the latter before that
maximum is reached.
 lt=gt (gt ≥ z)
lt=z (gt ≥ z)

lt=Percentage rate of growth of population

gt=Percentage rate of growth of income
z=Maximum rate of population growth

If gt < z and so is lt > z, the rate of growth of income

and population will continue to rise till the growth rate
of population equals z
 Cont…
• In the long run, population would grow at its maximum rate indicated
by Lz portion of the growth rate curve.

• Thus the shape and position of the technical progress function are not
affected by the changes in the population.

• So there are constant returns to scale, that is an increase in numbers,

given the amount of capital per head, leaves output per head
unaffected.
 Cont…
• Underdeveloped countries have low capacity to absorb the
technical changes, the T.P.F will be lowered with the
increase in the growth rate of population.

• If the rates of growth of income & capital continue to

diminish in the economy, both output per head & capital
per head cease to grow.

• If this situation persists, T.P.F may slip down.

• Then there will not be any long-run equilibrium. There may

be stagnation in the economy.
Conclusion
• Growth in population will lead to long-run equilibrium growth in
income depending upon the relative strength of two factors

(i) The maximum rate of population increase z

(ii) The rate of technical progress, which causes a certain percentage
increase in productivity, when both population & capital per head
are held constant.
Advantages
• Ultimate casual factor was not saving or capital accumulation, but
technical dynamism- the flow of new ideas and the readiness of the
system to absorb them.

• Explains not only the steady growth path of the economy but also
certain features
 Cont..
• Technical progress function can be equally applied to an
underdeveloped economy.

• Division of this model into two stages

• Use of technical progress function in the place of usual production

function.
Criticism
• It does not explain the determination of the rate of growth of the
economy, as like in Harrod-Domar models (in terms of volume of
investment, saving-income ratio and capital-output ratio).

• This model does not gives the stability and instability in the economic
system