Assignment Code: MEC-004/TMA/2022-23

Course Code: MEC-004

Assignment Name: Economics of Growth and Development

Year: 2022-2023

Verification Status: Verified by Professor

Answer all the questions.

SECTION A

Answer the following questions in about 700 words each. 20X2

Q1) Critically examine the basic formulations of the Harrod-Domar model of economic growth. How does the Harrod model explain the occurrence of trade cycles?

Ans) The Harrod-Domar Growth Model, which has come to be characterised as a combination of these two models, can be used.

Substance of the Model

Following is a summary of the HDM's main points:

1. The HDM's main subject is investment. It serves two purposes. It produces income on the one hand while also building up productive capacity on the other.

2. Depending on how the revenue behaves, the increased capacity leads to more output and employment.

3. Growth-rate conditions, or G Gw and Gn, can be used to describe how income will behave. Both the labour force and the capital assets would be fully utilised if these growth rates were identical.

4. These circumstances, however, simply indicate a consistent upward trend. The authorised growth rate may not match the actual growth rate. Cumulative inflation will occur in the economy if the actual growth rate exceeds the intended rate of growth. The economy will rapidly slide into cumulative deflation if the actual growth rate is less than the justified growth rate.

5. Business cycles are thought of as detours from the path of consistent growth. These alterations cannot continue forever. Upper and lower boundaries are constrained. Autonomous investment and consumption serve as a lower restriction, with the "full employment ceiling" serving as an upper limit. Between these two boundaries, the actual growth rate varies.

Limitations of the Model

Although HDM sheds light on key factors influencing economic growth, it is not without criticism.

The following reasons have been raised in opposition to the HDM:

1. The HDM presupposes that important variables like the capital-output ratio and the willingness to save are constant. These are indeed subject to long-term change. The conditions for sustained growth would change if these parameters changed.

2. Only aggregates are used as variables in the HDM. The interrelationships between the sectors cannot be depicted in a model built using such aggregates, and as a result, it cannot be used to illustrate structural changes, which are a fundamental component of the economic development of a developing economy. For the economy to grow steadily, diverse sectors must expand in harmony. Even when the aggregative prerequisites for stability are met, deviations from steady growth might result from a lack of harmony between the expansion of various sectors.

3. The HDM presupposes that the production function is constant, hence there is no room for factor replacement. In reality, distinct manufacturing components can be swapped for one another, at least to a certain level. Substitutability between various components makes the economy more adaptable and reduces the likelihood of cumulative deviance from the path of steady growth.

4. The HDM ignores the rate of growth in favour of focusing only on the conditions for consistent growth. It is more beneficial for industrialised nations whose top priority is stability rather than economic expansion. In contrast, developing nations are more concerned with the growth rate. If certain policies significantly increased the rate of growth, they would not mind adhering to those policies that cause swings.

5. The HDM, which is based only on the laizzez-faire principle and assumes fiscal neutrality, is intended to highlight the elements of progressive equilibrium for a developed economy. Therefore, the policy ramifications are not particularly pertinent to developing economies.

Despite these drawbacks, Keynes' static short-term saving and investment theory was dynamised and secularised in an interesting attempt with the HDM.

Q2) Discuss the concept of Golden Age Equilibrium in Joan Robinson’s model. What are its main criticisms?

Ans) The "golden age" equilibriums are those that result in smooth, steady growth and full employment as a result of the equality of the "desired" and "possible" rates of accumulation, according to Mrs. Robinson. According to the equation K/N=Q if Q is constant under the conditions of employment, we get,

K=QN

So, AK=ANQ

Or ∆N=∆K/Q

Or ∆N/N=∆K/Q/N=∆(K/Q)/(K/Q)  (So, N=K/Q)

∆N/N=∆K/K…………….(1)

According to equation (1), their labour and capital expand at the same pace if Q is constant at the full employment level. This is the balance of the "golden age." With full employment of labour and capital, the desired and attainable rates of accumulation are equal. Additionally, the growth of labour and capital is equal. As a result, the economy is growing peacefully and steadily at "a steady pace of accumulation that rolls gently on its course." In every way, harmony exists.

Stability of 'Golden Age' Equilibrium: Equilibrating processes automatically come into being to restore the economy's "golden age" equilibrium whenever certain forces act to upset it. If: The equilibrium path will diverge from the "golden-age" equilibrium path.

∆N/N>∆K/K or

∆N/N<∆K/K

In case (a), the population will grow faster than the capital stock. This signifies the situation of underemployment with the prevalence of surplus labour, money wage rates get depressed. But if price level is to remain unchanged the real wages will have to fall.

Case (b) or the second possibility for divergence from the 'golden age' equilibrium occurs where ∆N/N<∆K/K i.e., the rate of population growth falls short of the growth rate of capital-stock.

Limping Golden Age: Under this age, unemployment coexists with a constant rate of accumulation. It is conceivable that there is an adequate capital stock with a composition that is perfectly suitable for the intended rate of accumulation. However, as far as employing the full labour force is concerned, it could not be sufficient. Although the steady pace of accumulation is occurring, full employment requirements have not yet been met. Mrs. Robinson refers to this situation as the "limping golden age."

Depending on the pace of decline or rise in employability relative to the labour force, the limp's intensity can vary to varying degrees. The rate of unemployment would climb over time if the pace at which employment levels rise is lower than that of the labour force. In this instance, the limp is quite significant.

Leaden Age: It is actually a unique instance of a "limping golden age" where the degree of unemployment is rising as a result of an insufficient pace of accumulation.

Restrained Golden Age: Despite the fact that there is full employment today, the "desired rate" of accumulation exceeds the "possible rate," which is determined by the pace of growth, the rate of the labour force, and the rate of technical advancement. Due to constraints on the economy's ability to finance growth or labour market monopsony, the "realised rate" of growth is kept at or below the "possible rate."

A restrained golden age is one in which unemployment is high but real earnings are rigidly declining. As a result, in the absence of technological advancement, the pace of accumulation is constrained from rising. The existence of an "inflationary barrier" may be the root cause of the capital stock's insufficient growth.

Real wages must be decreased in order to increase the pace of accumulation. However, there is typically a minimum level of real wages that are considered acceptable, so as prices rise, there is typically a corresponding increase in money earnings as a result of organised labour’s efforts to stop real wages from falling below this minimal level.

Criticism

Mrs. Joan Robinson provides a fascinating breakdown of the various stages of the maturation process. It would appear that this model provides a more accurate study of the issue of economic development in nations that are still considered to be developing. In the Harrod-Domar model, the accumulation of capital is contingent upon the saving ratio and capital productivity.

However, in the Robinson Model, accumulation of capital is contingent upon the profit wage relation and labour productivity. This brings Robinson's model closer to describing a real market economy. The concept of a golden age places a premium on maintaining a balance between the pace of development in capital and the rate of growth in population. The gap that exists between the two growth rates is essential for less developed nations that are working toward achieving progress while maintaining stability. The model has a number of drawbacks, despite the fact that it has a lot of positive qualities.

Section B

Answer the following questions in about 400 words each. 12x5

Q1) Distinguish between economic growth and development. Briefly mention the main benefits that economic growth confers upon society.

Ans) The term "economic growth" in modern literature refers to increases over time in a nation's actual output of commodities and services. Although alternative metrics may also be used, the gross or net domestic product is typically used to measure output. Contrarily, the phrase "economic development" is much more inclusive. It suggests gradual adjustments to a nation's socioeconomic structure.

When seen in this light, economic development entails a consistent decrease in the GDP share of agriculture and a matching increase in the GDP share of the industrial sector and of economic services. This change in the economic structure is generally accompanied by a change in the occupational composition of the labour force as well as an increase in its productivity and skill. Economic growth is far simpler to achieve than development, which is a much more difficult goal. This is due to how much more prevalent the development process is.

The Importance of Economic Growth

It is challenging to determine how rapid growth's associated wealth and happiness are related. As there is insufficient proof to support the claims that the wealthy are happier than the poor or that people get happy as their fortunes rise. Economic growth should be related with lower levels of satisfaction since it depends on being proactive in searching out and seizing business possibilities. There is some evidence to show that the U.S. and Japan, two countries with among the highest levels of per capita income, experience psychological discontent at a much higher rate than the majority of the low-income economies in Asia and Africa. Moreover, the process of growth has a lot more benefits.

Following is a list of a few of these:

1. The benefit of economic progress is not that it makes people happier, but rather that it opens up more options for people to choose from.

2. One of the key tools for resolving social tensions that are often brought on by different population segments wanting to take more and more than they currently have is rapid economic growth. If the economy's revenue level is stagnant, one group's needs may only be satisfied at the expense of other groups, which often leads to social disputes.

3. Humans are different from other animals because we have more control over our surroundings, not because we are happier.

4. Women are likely to gain much more from economic growth than males do. The majority of domestic chores are performed by women in low-income economies, and many of these are carried out by mechanical devices in developed cultures. In the process, women are liberated from menial labour and released from the confines of the home, finally gaining the opportunity to exercise their minds and skills in the same way as men.

Q2) Explain the concept and implications of globalisation. Also discuss its advantages and shortcomings.

Ans) Globalisation, according to the Chambers 20th Century Dictionary, means “to make global, that is worldwide, or effecting or taking into consideration the whole world or all people”. It has become a buzzword not only for India but across the world.

Implications of Globalisation

1. Globalisation in its totality implies the following:

2. There is a spread of international trade.

3. People migrate from one country or region to another, temporarily or permanently.

4. Money or means of payment are exchanged on an increasing scale between countries or regions.

5. Capital flows from one country to another to help produce goods and services.

6. Finance-not necessarily linked to the production of goods and services – flows between different countries.

7. Traditional corporations arise which increasingly engage in the activities listed so far.

8. Technology is traded as between different countries. Increasingly, with the spread of the patent regimes governed by the WTO, frontier technologies take an increasingly proprietary form.

9. Spread of print and electronic media

10. Growth in trade and production of services of all kinds – shipping, insurance, banking, health care and, of course, finance.

Advantage of Globalisation

Supporters of globalisation argue along the following lines.

1. One, globalisation helps remove X-inefficiency. In the absence of globalization, prolonged protection of domestic industry has serious distortionary effects on cost structures. Exposure to competition acts as “bracing cold shower.”

2. Two, globalisation helps improve the allocative efficiency of resources, reduce the capital output ratio and increase the labour productivity, help to develop the export spheres and the export culture, increase the inflow of capital and updated technology into the country, increase the degree of competition in the domestic economy, reduce the relative prices of industrial and manufactured goods, improve the terms of trade in agriculture and, in general, give a boost to the average growth rate of the economy in the years to come.

3. Three, globalisation helps to restructure the production and trade pattern in a capital-scarce labour abundant economy in favour of labour-intensive goods and labour-intensive techniques.

4. Four, with the entry of foreign competition and the removal of import tariff barriers, domestic industry will be subject to price-reducing and quality-improving effects in the domestic economy.

5. Five, with the entry of foreign capital, the aggregate gross and net investment proportions to GDP will go up, and with a reduced capital output ratio the growth rate will go up.

6. Six, efficiency of banking and financial sectors will increase with the opening up of these areas to foreign capital and foreign banks.

Q3) Critically evaluate the theory of critical minimum effort. Also bring out its limitations.

Ans) The crucial minimum effort idea is linked to the name Harvey Leibenstien. The concept is based on how the three factors Per Capita Income, Population Growth, and Investment interact. Leibenstien noted that whereas investment is an income-generating factor, population is an income-depressing factor. When the elements that generate revenue outweigh those that reduce it, an economy can grow. A modest additional investment could result in a meagre income.

Reasons for Critical Minimum Effort

According to Lebenstein, the following conditions demand a critical minimum effort:

1. One is that some production components are indivisible, thus if they are not utilised entirely or to their utmost potential, internal inequities result.

2. Two, a variety of businesses and sectors interact and depend on one another. There are emerging overseas economies as these grow. It seems that only when at least that few industries are active that allow for these economies to exist can they be reaped.

3. Three: The economy may at any time be susceptible to independently produced income-depressing forces as well as depressants brought on by a certain part of the growing process.

4. Four, certain attitudes need to be acquired for development. Among these, "Western Market Incentives" are more significant since they imply a strong profit incentive, a readiness to take business risks, and a desire to advance scientific and technical process.

Criticisms of the Theory

Because the critical minimum effort may be divided into a number of smaller efforts that can be made at the appropriate times to put the economy on the path of sustainable growth, the theory is more feasible than Rosenstein-"big Rodan's pushy" hypothesis.

The following are some reasons why the hypothesis could be criticised:

1. One is that Leibenstein makes the assumption that as income rises over the subsistence level, population grows. After a certain income threshold, population drops. According to this presumption, an increase in income has a direct impact on population growth.

2. Two: Myint disputes Leibenstein's assumption that the functional relationship between per capita income and income growth rate is straightforward. It has two stages and is complicated. The rate of saving and investment in the first stage is influenced by the level of per capita income, which in turn is influenced by the distribution of income and the efficiency of financial institutions in mobilising saving. The second stage depends on the nation's economic and social structure for how investments and output are related.

3. Three: During the early stages of growth in undeveloped nations, external pressures are crucial. The role of external forces like foreign money, overseas trade, international economic linkages, etc. is not adequately explained by this theory. These forces have a significant influence on development, and these elements are crucial to the process of development.

Q4) Explain the meaning of planning as an instrument of resource allocation. Why is there a need for planning in the development process?

Ans) Planning is an intentional action with established objectives and predetermined strategies for achieving them. It can be thought of as a tool, method, or process used to carry out the pattern of resource use. It would be obvious that the fundamental tenet of planning is that it is an activity that is intentionally directed. Comparing this aspect of planning to a non-conscious action, like a market process, will help us better understand it.

The decisions made by producers and consumers are coordinated and made consistent by the prices, which are themselves the result of the interaction of supply and demand. In this procedure, resources are distributed among several manufacturing lines, and production-related factors are compensated. The fundamental production and distribution issues brought on by limited resources in the face of unending wants are resolved. The complete opposite of the market is planning. It makes predictions about what will happen and how it will happen.

Need For Planning

Economic planning is the cornerstone of economic policymakers all over the world, notwithstanding clichés like market-friendly states and consumer-friendly markets. There are several reasons why planning is necessary. These elements fall into two categories:

Non-Economic Factors: Those seeking to realise the goals of nations freed from colonial domination found planning to be a convenient institutional tool. Almost all of these nations started planning as soon as they gained independence.

1. Symbol of Sovereignty: In addition to the requirement for development to be compressed into a few years, newly independent counties discovered that planning might serve as a symbol of their independence and sovereignty. With the aid of development planning, these nations were able to associate themselves with the common objectives they shared as well as the means to which they were willing to devote their best efforts.

2. Break from the Parts: These nations wished to present a dramatic rupture from the past with their backwardness hanging around their necks like a millstone. They were able to forget about their past suffering and all the humiliation that came with it thanks to an objective symbolised in plans that included faster industrialization and development rates, among other things.

Economic Factors: The different economic variables that make it essential to use economic planning as a tool for resource allocation in some way can be summed up as follows:

1. The best possible combination of inputs can be secured by planning since resources whether they be natural, material, financial, or human are highly constrained.

2. Planning makes it easier to pinpoint the economic and social structural flaws that, from the perspective of economic growth, require the most attention.

3. A strategy for mobilising resources and savings is a crucial counterpart to an investment plan. Planning is designed to produce more capital formation than would otherwise be possible by posing several important challenges in development and seeking to give them a quantitative dimension.

Q5) Compare and contrast the Uzawa two-sector growth model with the Feldman model.

Ans) Two-sector models, whether of the neo-classical or fixed-coefficient sort, always have a similar structure. It is also thought of as homogenous to make a single homogeneous good with homogeneous capital and labour. The production of this homogeneous capital good itself takes place in a sector with homogenous labour and capital.

The Uzawa Model

A Solow-Swan kind of growth model with two produced commodities, a consumer good and an investment good, is what Hirofumi Uzawa's two-sector growth model takes into account. These two products are both manufactured using both labour and capital. The most intriguing aspect of our set of two outputs and two inputs is that one of the outputs also functions as an input. In the Uzawa two-sector model, labour and tractors are used to produce maize and tractors, to borrow an old Hicksian comparison.

In his two-sector growth model, Hirofumi Uzawa takes into account a Solow swan kind of growth model with two types of generated commodities: investment goods and consumer goods. Both of these things are produced using both labour and capital. In the Uzawa two-sector approach, we produce corn and tractors employing both manpower and tractors. Since there is no barrier competition in the factor market, there is free mobility of capital as well as commodities and services within the sector. This indicates that both the consumer goods business and the investment products industry must have the same pay rate and profit rate.

The Feldman Model

Marx's two-department extended commodity reproduction plan, which greatly impacted Feldman's model. Feldman's model is crucial because, despite existing far earlier than Harrod and Domar's models, it produces outcomes that are comparable to their models. Feldman's concept is comparable to the Lewis model of development for developing countries in that production growth is only limited by the availability of capital.

On the other hand, the Feldman model reported that the labour market was "gradually improving" as opposed to "starting to improve". Feldman initially showed that more capital required to be allocated to the producer goods and services sector as an economy's aggregate growth increased. Feldman's two sector growth model was based on the macroeconomic theory of Karl Marx. The economy would expand more quickly the more capability there was to generate goods.