Assignment Code: BECC-141/AST/TMA/2022-23

Course Code: BECC-112

Assignment Name: DEVELOPMENT ECONOMICS-I

Year: 2022-2023

Verification Status: Verified by Professor

Maximum Marks: 100

Answer all the questions

A. Long Answer Questions (word limit-500 words) 2 × 20 = 40 marks

1) Discuss the Classical Theory of Economic growth. Discuss the Marxian criticism of the Classical Theory of growth.

Ans) Adam Smith, Thomas Malthus, and David Ricardo were three classical economists whose work was primarily an analysis of the process of economic growth. They could be viewed as the primary forerunners of the current growth theory. They were specifically confronted with the facts of social and economic changes occurring in the modern English society of the 18th and 19th Centuries as it was either anticipating or experiencing the Industrial Revolution. They conducted their research in light of the advent of the Industrial Capitalist system, a new economic system. Since "progress" was viewed as the expansion of national wealth, it was crucial for the development of a society. As a result, the principle of national advantage was considered to be a crucial standard for economic policy. From this perspective, they attempted to demonstrate that the exercise of individual initiative under freely competitive conditions to promote individual ends would produce results beneficial to the society as a whole. Progress was also conceived within a framework of a need to preserve private property and thus, the interests of the property-owning class. The operation of competitive market forces and the limited activity or role of government could be used to resolve competing economic interests of various groups.

A supply-side driven model of growth was proposed by Adam Smith. According to Smith's traditional view of the time, population growth is endogenous and is dependent on the amount of food that can be produced to support the growing labour force. Land growth was dependent on the conquest of new lands (such as colonisation) or the technological improvement of the fertility of old lands; investment was also endogenous and determined by the rate of savings (mostly by capitalists). Smith's famous thesis that the division of labour (specialisation) improves growth was a central argument, and technological advancement could also increase growth overall. Smith also saw advancements in trade and machinery as growth-promoting factors because they allowed for greater specialisation. Additionally, Smith put forth the theory of economies of scale by asserting that "division of labour is limited by the extent of the market." The possibility of further labour division and consequent growth is created as output rises due to the division of labour (increasing "the extent of the market").

The renowned book "Das-Capital" by Karl Marx contains the Marxian model of economic growth. The key components of the traditional model of economic growth are rejected by him. He disagrees with the law of diminishing returns and claims that the classical model's stationary state's final result is the result of human arrangements, not a natural process. Moreover, he disagrees with the Malthusian theory of population.

Marx's theory views economic growth as a continuous change in the social, cultural, and political life of society and aims to integrate economics and sociology. According to this theory, the dynamic forces of production and the slowly developing social and political structures that enable production form strained relationships that allow economic systems to advance. The stages of development are as follows: primitive, communal society; feudalism; capitalism; socialism; and communism. He asserted that a class struggle is a hallmark of capitalism. A revolution that would change capitalism, which is based on private ownership, into socialism, which is based on public ownership, would eventually result from growing conflicts between labour and capitalists.

2) Explain the concept of economic inequality. Explain the various methods of measuring economic inequality.

Ans) The primary factor that gives one person a variety of options and denies those same options to another is economic inequality. It has to do with ideas like longevity, capacity, political freedom, and social contribution. Let's examine a few instances that demonstrate this: One person makes more money than the other, but he lives in a nation that denies him freedoms like the ability to vote or travel. Similar to this, one person may earn more than another up until a certain age before losing ground to them. Economic inequality therefore cannot be precisely defined. Whether we choose to examine the distribution of wealth, the distribution of current income, or the distribution of lifetime income will depend on our choice. The current income illustrates inequality at a specific moment in time, and if it is only momentary, it is not harmful from an ethical or economic system perspective. A person with a higher personal income will be categorised as belonging to the higher income group. Different inequalities measures have been developed over time with the personal distribution of income approach in mind. a few are covered below:

Lorenz Curve

The most prevalent and well-known indicator of income inequality is the Lorenz curve. Prof. Max D. Lorenz, an American economist and statistician, proposed this curve. He used this curve to quantify income distribution disparities. A cumulative frequency graph looks like this curve. It is used to present information on a nation's population and distribution of wealth. To create this curve, the population and income components are required. The numbers must be expressed in percentages before being arranged in a cumulative frequency distribution. A straight line is drawn from the origin to the coordinate of 100% income and 100% population, where it ends. The Line of Equal Distribution is the name given to this line. This line serves as a benchmark to assess the degree of inequality in a nation.

Quintile Distribution

The Lorenz curve's non-numerical portion can be handled in some way. Numerical representations of the same underlying distributional information are also possible. The idea of organising the income distribution by population quintiles is one that the World Bank favours (20per cent of the population). For instance, the richest quintile in India earns 41.4% of the total income, while the poorest 20% of the population earns 8% of it.

The range

Calculating this measurement is very easy. The income disparity between the richest and poorest people is the first thing we discover. To eliminate the reliance on the units used to measure income, this difference is then divided by the mean. This is a pretty basic measurement. People in the middle of the income spectrum are completely ignored by it.

The Kuznets ratios

These ratios of income distributions in developed and developing countries were developed by Simon Kuznets in his ground-breaking study. Comparing these ratios to the quintile distribution, they are essentially one step further. These ratios represent the division of the income owned by the poorest x% of the population by the richest y% of the population, where x and y represent numbers like 10, 20, or 40. A high ratio indicates that there is greater equality in society.

B. Medium Answer Questions (word limit-250 words) 3 × 10 = 30 marks

3) Discuss the significance of the four liberal principles of democracy.

Ans) The main liberal democratic value is liberty, which is only limited by John Stuart Mill's assertion that people are free to do as they please as long as they don't harm others. In other words, Liberal Democrats value diversity, welcome people from all backgrounds, and embrace pluralism. They also think that diversity makes society stronger. Liberal Democrats prioritise liberty when it conflicts with other Liberal Democrat principles, such as equality.

Welfare and equality. Liberal Democrats think that everyone deserves to be cared for and respected equally. Therefore, we think that in order to reduce inequality, the state should use progressive taxation and public investment while keeping the extremes of income within generally acceptable bounds. This would entail offering a sizable safety net to those whose incomes, for whatever reason, are insufficient to allow them to fully participate in society's rights and obligations. The Liberals, including Lloyd George (the People's Budget, sick pay, retirement pensions), and Winston Churchill (employment exchanges), introduced the Welfare State. It was based on the tenets of William Beveridge's historic report and employed J. M. Keynesian economics.

Liberal Democrats view education as a profoundly liberating experience. We disapprove of the constrictive relationship between education and employment and think everyone should have access to and a chance to pursue education for its own sake at any time in their lives. We reject the current "league table mentality" because it largely categorises people based on their social circumstances and is an unjustified way to discredit dedicated teachers who choose to work in challenging schools.

Public health and preventive medicine should be given top priority in a democratic regional structure that determines health policy.

4) What do you understand by a natural monopoly? Why are public utilities usually natural monopolies?

Ans) Because only one company can thrive in a market where production is characterised by increasing returns to scale, such a market is known as a natural monopoly. At first, several rival businesses will "race to get big." The larger businesses will be able to set lower prices because they will have lower average costs than their smaller rivals. Smaller companies won't be able to turn a profit and will be eliminated from the market. In the end, there will be just one company left in the market. Due to their use of networks to deliver services, utilities frequently operate as natural monopolies. For instance, before starting operations, an electric power company needs to build generating stations to produce power and trunk lines to distribute it, but once operational, it can deliver power to numerous customers by connecting them to its power grid. The power company can lower average costs by spreading the fixed costs (of the generating stations and trunk lines) over a larger user base thanks to the expansion of its customer base. The same justifications can be made for water and sewage systems, postal services, local phone services, cable TV, and railroads. The monopolist increases production until marginal cost and marginal revenue are equal in order to maximise profits. The welfare of society is not maximised by these decisions. As you may recall from earlier reading, monopolies also result in deadweight loss in addition to producer and consumer surplus. There are two ways to increase a monopoly's net social benefits. The first is to regulate the monopoly, which entails setting the monopolist's output and price. The second option is for the government to buy and run the business.

5) Explain the Learning-by-Doing model of Kenneth Arrow.

Ans) According to the economic theory of learning-by-doing, productivity can be attained through practise, self-improvement, and small innovations. This idea was incorporated by Kenneth Arrow into his Endogenous growth theory to describe the effects of innovation and technological advancement. The 1962 publication of Arrow's classic paper "The Economic Implications of Learning by Doing" demonstrated how this concept fits into the contemporary theory of economic growth and served as a basis for a critical analysis of some astounding recent developments. He explained how rising capital-labor ratios alone cannot fully account for increases in per capita income. He looked at how knowledge must be acquired while identifying how technological change affects economic growth and explaining the idea of knowledge that underlies a production function.

He subsequently proposed an endogenous theory of the knowledge changes that underlie intertemporal and global changes in production functions. Although the term "learning" for the process of acquiring knowledge can be interpreted in various ways, all schools of thought agree that learning is a by-product of experience. It can only occur when a problem is being attempted to be solved, so it can only occur during an activity. His generalisation that learning associated with repetition of essentially the same problem is subject to diminishing returns is based on many of the classical learning experiments. For any given stimulus, there is an equilibrium response pattern that the learner tends to with practise. Therefore, to have steadily improving performance, the stimulus situations themselves must be continuously evolving rather than just repeating.

C. Short Answer Questions (word limit 100 words) 2 × 3 × 5 = 30 marks

6) Differentiate between:

(a) Exogenous Growth and endogenous growth.

Ans) According to the endogenous growth theory, internal rather than external forces drive economic growth in the main. According to the endogenous growth theory, investments in knowledge, innovation, and human capital have a significant impact on economic growth. The theory also emphasises how a knowledge-based economy will have advantageous spill over effects and positive externalities that will promote economic growth.

According to the endogenous growth theory, internal factors within the economy, rather than external ones, are what drive economic growth. The theory is based on the idea that advances in innovation, knowledge, and human capital result in higher productivity, which is good for the outlook on the economy.

(b) Capital-augmenting technical change and capital-deepening technical change.

Ans) The costs of the two main factors, labour, and capital, have behaved very differently over the past 150 years of growth. The rental price of capital, or interest rate, has roughly remained constant while the wage rate, or rental price of labour, has increased rapidly. Despite the economy's long-term resemblance to the standard Solow model, along the transition path it will frequently undergo capital-augmenting technical change. As long as capital and labour are gross complements—that is, the elasticity of substitution is less than—the economy will eventually converge to the path of balanced growth. The elasticity of substitution is less than 1, so it makes intuitive sense that a high capital share in GDP will lead to further capital-augmenting technical change, which will drive down the share of capital.

(c) Market Failure and Government Failure.

Ans) The first fundamental theorem states that when certain conditions are met, competitive markets lead to an efficient distribution of resources. When we talk about efficiency, we're talking about a Pareto-efficient allocation and a Pareto-optimal circumstance. No one can be made better off without also making someone else worse off, according to the Pareto optimality theory. You might be able to make someone's situation better. Government failure is the general term used to describe the government's inability to achieve its stated goals. In response to those who raise the possibility of market failure, this idea has been advanced. Roughly speaking, the argument is that just because there is a market failure, the government cannot simply intervene and improve things.

7) Write short notes on the following.

(a) Lorenz Curve.

Ans) The most prevalent and well-known indicator of income inequality is the Lorenz curve. Prof. Max D. Lorenz, an American economist and statistician, proposed this curve. He used this curve to quantify income distribution disparities. A cumulative frequency graph looks like this curve. It is used to present information on a nation's population and distribution of wealth. To create this curve, the population and income components are required. The numbers must be expressed in percentages before being arranged in a cumulative frequency distribution. A straight line is drawn from the origin to the coordinate of 100% income and 100% population, where it ends. The Line of Equal Distribution is the name given to this line.

(b) Growth Accounting.

Ans) Productivity, also known as total factor productivity (TFP), is a key idea in the context of a country's economic development, especially in developing nations. Productivity is a factor in both industrial growth and global market competitiveness. It describes the rate at which employment is produced using the resources that are already being used. Increased productivity improves resource utilisation, lowers the cost and price of industrial goods, and accelerates the growth of demand on both domestic and global markets. The idea has gained popularity and is used as a benchmark to rank businesses or nations ever since Robert Solow) decomposed output growth into the contribution of input growth and a residual productivity term.

(c) Convergence.

Ans) According to the convergence hypothesis, the per capita incomes of poorer economies grow more quickly than those of richer nations. The 'catching up' hypothesis is another name for the convergence hypothesis. The claim is based on the Solow growth's structure and outcomes, which you studied in unit 5. According to this model, economic growth is fuelled by the accumulation of physical capital up until the "steady state," or level of capital per worker where output, consumption, and capital are all constant, is reached. When the amount of physical capital per person is low, the model predicts faster growth; this is also known as "catch up" growth.