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Instructor: Msc.Nguyễn Trọng Đắc 1. Nguyễn Thị Mai Anh 2. Đậu Văn Hải 3. Hoàng Thị Mỹ Liên 4. Trần Hồng Nhung 5. Trần Thị Hà Thương 6. Nguyễn Thị Thúy Vân
• Theories of economic growth are most basic expression of economic growth based on economic factors and their relationship. • Some important models of economic growth: 1. Harrod-Domar Growth Model 2. Solow Model 3. Rostow's Model 4. The Lewis Dual Sector Model of Development 5. Two-sector models
The Harrod-Domar Growth Model
Theory of Model
Used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital.
The starting point of this model
J.Keynes opinion on equilibrium below potential level and the role of spending (aggregate demand) Investment causes income effect (Harrod same point with J.Keynes) Investment by saving (S = I) Investment to increase capacity of economy (I = ΔK) Fixed technology
Contents of Model The role of resources factors in the growth The factor effect directly to the growth Y = f(K. 6 .L) Factors play a decisive role + S is the source of investment (I) + I create ΔK for the following period + ΔK create directly ΔY of this period → Saving and investment create capital stock which play a decisive role in economic growth.
Content of Model Role of the capital in economic growth The relationship between ΔK and ΔY +Incremental Capital Output Ratio (ICOR) =ΔKt /ΔYt = It-1/ ΔYt ICOR measures the productivity of additional capital which depends on: + Level of scarce resource + Efficiency of management and using capital 7 .
Harrod-Domar growth model and the rationale 8 .
doubling inputs will double output • The most efficient production point is at the elbow 9 .The fixed-coefficient production function • Q= min F(L.e.K): the production Isoquant is L shaped • It shows constant returns to scale (CRS) i.
Harrod-Domar Prod. Function • Y= (1/v)x K or Y=K/v (1) • Where v= constant or v=K/Y (2) + v= capital output ratio or measure of the productivity of capital or investment • (1) can be convert to relate changes in output to changes in the capital stock: Y=K/ v (3) • The growth rate of output g=Y/Y (the increment in output divided by the total amount of output) → g =Y/Y=K/Y*v (4) because ∆K=sY-d*K →Finally the Basic Harrod Model: g= (s/v)-d (5) 10 .
G Summary • The steady-state rate of growth is determined by: the saving rate the fixed incremental capital-output ratio (ICOR). and the rate of depreciation of fixed capital 11 .The Harrod-Domar model of E.
Advantages • Is its simplicity. the equation is easy to use and estimate. -> It makes clear that saving is crucial for income to grow over time. • The data requirements are small. • Can do reasonable job of estimating expected growth rates in most countries over very short periods of time (a few years). • Focuses on the key role of saving. 12 . • Can be accurate from one year to next year.
human resource development (education and training) • Economic growth is a necessary but not sufficient condition for development • Many developing countries lack a sound financial system 13 . supply side approach (free up markets).g. • Diminishing marginal returns to capital equipment exist so each successive unit of investment is less productive and the capital to output ratio rises. • The amount of investment is just one factor affecting development e.Disadvantages • It is difficult to stimulate the desired level of domestic savings • Meeting a savings gap by borrowing form overseas causes debt repayment problems later.
Solow Model ( Neoclassical Growth Model) 14 .
• Explain by looking at productivity. capital accumulation.Theory of Solow Model • Is the neoclassical growth model • Is a class of economic models of long-run economic growth. population growth and technological progress. 15 .
2 16 .L) Labor and Capital are substitutable • The production function is ushaped showing substitution as in figure 4.Characteristics • An improvement over HarrodDomar Model • It drops fixed coefficient or no substitution • Allows for substitution between factors • Y= f(K.
Where: n = population growth rate d = depreciation k = capital per worker y = output/income per worker L = labor force s = saving rate 17 .Solow growth model diagram • The model starts with a neoclassical production function Y/L = F(K/L) or y = f(k).
The Basic Solow Growth Model • Point A is where new savings Sy = amount of new capital needed for growth in the labor force and depreciation (n+d). but GDP per capital (y) is constant. 18 . • Point A is steady state level of capital per worker where stable equilibrium occurs • At steady state total output continues to grow at the rate of population (n) or labor force.
this introduces a new capital widening line (n’ + d) 19 .The Effect of Changes in Saving Rate and Population Growth • An increase in the Savings rate in the Solow Model from s to s’ results in an shift in capital deepening curve -> So capital per worker increases from k0 to k3 or A to B • The population growth rate has now increased from n to n’.
The effect of Population Growth in the Solow Model 20 .
The Effect of Technical Change on Solow Model 21 .
Strengths of Solow Model • An improvement over HarrodDomar Fixed coefficient model • Allows for substitution between inputs and outputs • Provides good insights about the relationship between role of technology and innovation on growth 22 .
Extension to the Harrod–Domar Model Adding labor as a factor of production Requiring diminishing returns to labor and capital separately and constant returns to scale for both factors combined Introducing a time-varying technology variable distinct from capital and labor. 23 .
and assumes saving rate. One sector approach.Weaknesses of Solow Model Lack of direct insight on the fundamental factor influencing the steady state. factors that drive steady state. Not shed light on the role of the allocation of capital and labor among various sector. and technical change as given Not explain how these parameters change over time. 24 . population growth .
25 . growth rate of savings and labor force.New Approaches to Growth • The Solow model assumes fixed or exogenous saving rate. • These new models allow for increasing returns to scale and positive and negative externalities • They are called endogenous models but their estimation suffers from lack of good data. • Recent works provides models where these variables are determined within or endogenously in the model.
Rostow's Model.the Stages of Economic Growth 26 .
Rostow. Stage1: Traditional society Stage2: Transitional stage ( the preconditions for takeoff) Stage3: Take off Stage4: Drive to maturity Stage5: High mass consumption 27 . the American Economic Historian suggested: countries passed through 5 stages of economic growth.Theories • In 1960.
Rostow’s Model Stage 5 Stage 4 Stage 3 Stage 2 Take off Transitional stage Drive to maturity High mass consumption Stage 1 Traditional society 28 .
Limited technology Existence of barter High levels of agriculture and labour intensive agriculture - 29 . Output not traded or recorded.Stage 1: Traditional society Characterized by subsistence agriculture or hunting & gathering.
30 .Stage 2: Transitional stage .Increase in capital use in agriculture -Some growth in savings and investment .Emergence of a transport infrastructure to support trade -External trade also occurs: primary products.
Stage 3: Take off -Industrialisation increases -Some regional growth -The level of investment reaches over 10% of GNP. 31 .
Stage 3: Take off -Number employed in agriculture declines -The "secondary" (goodsproducing) sector expands .Further growth in savings and investment 32 .
Stage 4: Drive to maturity -The economy is diversifying into new areas -Wide range of goods and services .Manufacturing shifts from investment-driven (capital goods) towards consumer durables & domestic consumption. 33 . . less reliance on imports.
universities.Stage 4: Drive to maturity -Increase in levels of technology utilised -Transportation infrastructure develops rapidly .Large-scale investment in social infrastructure (schools.) 34 . etc. hospitals.
High output levels .Mass consumption of consumer durables .Stage 5: High mass consumption .High proportion of employment in service sector 35 .
• Is known at the outset • Is derived from the historical geography of a developed.Advantages of Rostow’s Model • Is historical in the sense that the end result. bureaucratic society. • Its sense is to determine development level of each country in each period. • It suggests that each country needs to promote and complete the needs for the development in each period 36 .
• Not apply to the Asian and the African countries • The stages are not identifiable properly as the conditions of the take-off and pre take-off stage are every similar and also overlap. • Growth and development of some countries don’t need to separate above 5 stages • The beginning of each country is different while this theory doesn’t base on it • Just studies the growth 37 .Disadvantages of Rostow’s Model • Just based on American and European history -> integral to the economic development process of all industrialized societies. so it is not divided into clear and exact stages. not interrupted. • Growth is a continuous process.
and dramatically improved Vietnam's business climate •(GDP) increases 8% from 1990 to 1997 and 6.8% over the first 9 months of 201 38 .Application for Vietnam Vietnam is in the take-off stage in the Rostow’s model •The 1986 Sixth Party Congress approved broad economic reforms introduced market reforms.5% from 1998-2003 •GDP grew more than 8% annually from 2004 to 2007 •GDP is 6.8% in 2010. and reached 5. opened up the country for foreign investment.
up 1% compared to the same period in 2010 • From 1990 to 2011. Vietnam’s exports ($70 billion) were up by 23% compared to the same period in 2010 • Per capita income rose from $220 in 1994 to $1. up from 8.Application for Vietnam • In the first 9 months of 2011. disbursed FDI capital totaled $9.2% in the first 9 months of 2011. Increased to 18. agricultural production nearly doubled • In the first 9 months of 2011.6% in the same period of 2010 • Industry and construction contributed 41% of GDP in 2010 39 .1 billion.168 in 2010.
• 40 . is credited for the development of the Dual Sector Model.Lewis Dual Sector Model • Sir Arthur Lewis. an economist from Saint Lucia. His contributions to developmental economics earned him a Nobel Prize in economics.
• Explains the mechanism of changing structure of underdeveloped economics • Move from subsistence agriculture to more modern and more urbanized.change theory. • Became the general theory of the development process for surplus labor nation during 1960s and early 1970s.Theory of Model • Is a structural. 41 .
Mainly agriculture Is characterized by very stagnant Labor productivity is very low and surplus labor Modern sector Productivity is high Be able to accumulate. 42 . Marginal productivity of labor is zero.. Labor is gradually transferred into this sector from traditional sector Is overpopulated subsistence Is urban industrial sector.Dual Sector Model Traditional sector sector.
The Lewis Model 43 .
Provide a good general theory on labour transitioning in developing economies.The advantages of Model Attracted attention of underdeveloped countries. Brings out some basic relationships in dualistic development. 44 .
45 .Disadvantages of Lewis Model • Capital accumulation • Surplus Labor • Competitive labor market in modern sector • The modern sector might continue to use more and more of capital instead of labor.
Viet Nam economic Is not a dualistic economy But its move to a market economy. -> For agriculture and earn money to create economic growth in Vietnam. 46 . We need agriculture to export of rice. bring money for raw materials and machinery. Agriculture remains the main front of us.
Two Sector Model • • Recognize the prime importance of labor and capital in the growth process Explore differences in both the levels and growth rates of productivity in different activities and the implications for relative wages Include: .The 2-Sector Labor-Surplus Model (Lewis Classical Model) .The Neoclassical Two-Sector Model • 47 .
The 2-Sector Labor-Surplus Model (The Lewis Classical Model) 48 .
4.10: The Supply and Demand for Industrial labor 49 .The 2-Sector Labor-Surplus Model (The Lewis Classical Model) Fig.
The 2-Sector Labor-Surplus Model (The Lewis Classical Model) 50 .
The Lewis Classical Model 51 .
The Neoclassical Two-Sector Model 52 .
The Neoclassical Two-Sector Model 53 .
54 . Neoclassical Population growth is not a negative effect.The Differences implications in neoclassical and classical model Classical model Population growth is a negative effect.
Thank you for attention! 55 .
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