Development Economics
BA-4706
BBA 5
Lecture # 4
Dr. Muhammad Aqil
Questions to be discussed
What are the Characteristics of Modern
Growth?
What is the difference between economic
theory and model?
What are various Models of Economic
Growth?
HDI Calculation
Important Factors of
Economic Growth
Important Factors of Economic Growth
1. Capital Accumulation
Positive Relationship
2. Population and Labor Force Growth
Greater the Skilled Labor, Greater the Growth
3. Technological Progress
Positive Relationship
Production Possibilities Frontier
Effects of Three Factors on PPF
1. If Human Resource in Industry is improved
2. If Human Resource in Agriculture Sector is
improved
3. If Technology in Industry is improved
4. If all the factors in industry and agriculture
are improved
5. If Technology in Industry is improved and
few of land becomes infertile.
Classical
Economic
Growth Models
Economic Theory and Model
Economic theory are ideas and principles
that tends to explain the relationships or
function or process. Such as theory of
demand, Supply, Market Equilibrium etc.
Economic Model is the precise application
representing the relationship between
variables often in Mathematical terms.
D= f(p)
QD = 30 - 20 P
Classical Theories of Development
1. The Linear Stages of Growth Model (1950-
60)
2. Patterns of Structural Change (1970s)
3. The International Dependence
Revolution(1970s)
4. The Neo-Classical Theories (1980s and early
1990s)
1. The Linear-Stages Theories
i. Walt Rostow’s Stages of Growth
ii. The Harrod-Domar Growth Model
Rostow’s Stages of Growth
Developed countries have tended to pass
through 5 stages to reach their current
degree of economic development.
5 Stages of Rostow Growth Model
i. Traditional society- Based on Primary Goods
ii. Pre-conditions for take-off
Agriculture becomes more mechanized
Small growth in Savings and Investment
Foreign Aid and Remittances
iii. Take-off
Manufacturing Sector starts growing
Agriculture Sector less important
High Saving and Investment
5 Stages of Rostow Growth Model…Cont.
iv. Drive to maturity
Diversified Industry
Improved Technology
v. Age of mass consumption
High GDP
Developed Tertiary Sector
Mass Consumption
Developed Middle Class
ii. Harrod-Domer Model-Saving and
Investment
The Economic Growth depends upon Savings
and Investment
The Rate of Economic Growth depends upon
Level of National Savings
Productivity of Capital Investment i.e. Capital-
Output Ratio
What Is Capital Output Ratio?
If $ 3 of Capital Produces $1 of GNI then
COR= ∆K / ∆ Y = 3/1=3
ii. Harrod-Domer Model …Cont.
S= Saving Rate x Income OR
S= SR x Y……………………..Equation 1
But Investment = Change in Capital Stock
So, I= ∆K ……………………..Equation 2
Since, Capital Output Ratio = COR = ∆K / ∆ Y
Or ∆K = COR x ∆Y ……………………..Equation 3
As we know that S=I So, S=I OR
(SRxY) = ∆K OR ……………………..Equation 4
(SRxY) = COR x ∆Y OR ……………………..Equation 5
∆Y/Y = SR/COR and ……………………..Equation 6
∆Y/Y = GDP Growth Rate ……………………..Equation 7
GDP Growth Rate = ∆Y/Y =Savings rate / Capital output ratio
OR GDP Growth Rate = SR/ COR ……………………..Equation 8
OR GDP Growth Rate = IR/ COR ……………………..Equation 9
If the savings rate is 10% and the capital output ratio is 2, then
GDP Growth Rate = 10/2 = 5% P.a.
Application of Model
Q.1: From 1980 to 1990, real GDP in India grew by 5.8 percent per
annum, while investment averaged 23.1 percent of GDP. What was
the COR for India between 1980 and 1990?
Q.2: In Indonesia during the 1970s the capital-output ratio (COR)
averaged 2.50%.
a. Using the Harrod-Domar growth equation, what saving rate would have
been required for Indonesia to achieve an aggregate growth rate of 8
percent per annum?
b. With the same COR, what growth target could be achieved with a saving
rate of 27 percent?
c. If there is a massive increase in the saving rate, and therefore a big
increase in the amount of new capital formation, is the COR likely to rise,
fall, or remain the same? Explain.
Application of Model
The government of a poor developing country
fears that a political crisis will occur unless the
growth rate is at least 4 percent per annum. The
COR and the saving rate are projected to be COR
= 5.0 and s = 14 percent, respectively.
Required:
a. Show that 4 percent growth cannot be achieved
under these circumstances.
b. With the saving rate as given, what COR would be
required to achieve the 4 percent growth target?
Application of Model-Solution
Q.1: From 1980 to 1990, real GDP in India
grew by 5.8 percent per annum, while
investment averaged 23.1 percent of GDP.
What was the COR for India between 1980
and 1990?
COR= ∆K / ∆ Y
= 23.1/5.8 = 3.98
Application of Model-Solution
Q.2: In Indonesia during the 1970s the capital-output ratio (COR) averaged
2.50%.
a. Using the Harrod-Domar growth equation, what saving rate would have been required
for Indonesia to achieve an aggregate growth rate of 8 percent per annum?
Growth Rate = SR/ COR
SR = GR x COR
8 x 2.5 = 20%
b. With the same COR, what growth target could be achieved with a saving rate of 27
percent?
GR = 27/2.5 = 10.8%
c. If there is a massive increase in the saving rate, and therefore a big increase in the
amount of new capital formation, is the COR likely to rise, fall, or remain the same?
Explain.
COR= ∆K / ∆ Y
Rise
Criticism on Rostow and Harrod
Models
Savings is Necessary Condition but not sufficient
The Model worked for Europe due to Institutional
and attitudinal Conditions
The Model is not valid for Developing Countries
due to the following reasons:
Lack of Managerial Competence
Lack of Skilled Labor
Lack of Planning
Lack of Goofd governance
Lack of developed Markets
2. Structural Change Model
Structural Change Theory-
Movement from Primary to Secondary and Tertiary
From Rural to Urban
From Traditional to Modern Techniques
The Lewis Model
A development model of dualistic economy, i.e.
rural agricultural and urban manufacturing sectors
Initially, Majority of labors employed in Agriculture
After sometime, the labors become less productive
due to Law of Diminishing Marginal Returns
The Lewis Model.. Cont…
Underemployed labors will be shifted towards urban
areas for industry
Labors tend to produce a higher value of output in
industry than agriculture
The result is higher urban wages
High wages would tempt surplus agricultural workers to
migrate to cities and engage in manufacturing activity.
High urban profits would encourage firms to expand
and hence result in further rural-urban migration
Criticisms of the Model
The assumption of Re-investment of Profit
may not be true
Reinvestment may be in Capital instead of
Labors.
The assumption of mobility of labors from
agriculture to industry may be wrong.
Wage levels may vary in industry
3. The International Dependence Models
1. The Neocolonial Dependence Model
Under development is due to exploitation of Capitalism and this
economic system needs to be changed
2. The False Paradigm Model
Under development is the outcome of wrong advices from International
agencies which need to rectify.
3. Dualistic-Development Thesis
There is always an existence and persistence of increasing divergence
b/w rich and poor that prevent the weaker to grow.
4. Recommendations
They raise above questions on economic models
Emphasis upon international power balance and political, economic
and institutional reforms internationally and locally
HDI Calculation
1. Life Expectancy Index (LEI) = Life Expectancy of a
country -20/ 85-20
Life Expectancy Index =LEI = (LE-20)/(85-20)
2. Education Index = (MYSI + EYSI)/2
Mean Years of Schooling Index (MYSI) =
MYS-0/15-0
Expected Years of Schooling Index (EYSI) =
EYS-0/18-0
3. Income Index (II) =
(Ln (GNI PC of Country) – Ln (100)/ (Ln (75000) – Ln (100 )
HDI Calculation for Pakistan -2018
Expected years of schooling (years) =8.6
Mean years of schooling (years) =5.2
Gross national income (GNI) per capita (2011 PPP
$) = 5,311
Life expectancy at birth (years) = 66.6
Calculate HDI for Pakistan?
http://hdr.undp.org/en/countries/profiles/PAK
Ln(100) = 4.60517
Ln (75000) = 11.22524
Ln (5311) = 8.57753
Human development groups
HDI Value Life Expected Mean Years of Gross national
Expectancy at Years of Schooling income (GNI)
Birth – 2017 Schooling per
capita
Group
Very high
human
development ??? 79.5 16.4 12.2 40,041
High human
development 0.757 76.0 ??? 8.2 14,999
Medium
human
development 0.645 69.1 12.0 6.7 ???
Low human
development 0.504 ??? 9.4 4.7 2,521
Human development groups
HDI Value Life Expected Mean Years of Gross national
Expectancy at Years of Schooling income (GNI)
Birth – 2017 Schooling per
capita
Group
Very high
human
development 0.894 79.5 16.4 12.2 40,041
High human
development 0.757 76.0 14.1 8.2 14,999
Medium
human
development 0.645 69.1 12.0 6.7 6,849
Low human
development 0.504 60.8 9.4 4.7 2,521
Life Expected Mean Years Gross
Expectancy Years of national
at Birth – of Schooling Schooling income
2017 (GNI) per
capita
HDI
Regions Value
Arab States 0.699 71.5 11.9 7.0 15,837
East Asia and the Pacific 0.733 74.7 13.3 7.9 13,688
Europe and Central Asia 0.771 73.4 14.1 10.3 15,331
Latin America and the
Caribbean 0.758 75.7 14.4 8.5 13,671
South Asia 0.638 69.3 11.9 6.4 6,473
Sub-Saharan Africa 0.537 60.7 10.1 5.6 3,399
