Chp 23 : Theories of Economic Growth and Development
Joseph Aloi Schumpeter
What is growth?
Economic growth is the increase of nation real output
Improvement in the quality of resources
Technological advances that boost productivity
Greater quantities of natural resources,human resources and capital
Development
Economic development is process by which a nation enhances its standard of living over time
The economic standard of living is often defined as GDP per capita
Growth and Development Models
Harrod and Domar- Keynesian Growth
Solow- Neoclasssical growth
Shumpeter- economic development and institutional change
Nurkse, Lewis, Schultz- theories of economics development
Sir Roy Harrod & Evsey Domar
Evsey Domar
Domar has made contribution in three main areas of economics: economic growth, comparative economics and economics history
His work on economic growth began with his 1944 model on government debt, which considered how economic growth can lighten the burden of the governement debt
Harrod-Domar Growth Model
Harrod Domar growth model as a way of extending the Keynesian demand-determined equilibrium into long run.
Capacity Creating Effect of Investment
Domar noted that net investment spendingadds to the nation stock of capital,increase the economy capaciy and raises its potential level of income.
Change in productive capacity will depend on the level of Investment I and the potential social average productivity of new investment
Demand-Creating effect of Investment
Investment spending in new period must exceed the amount in previous period if the added potential income arising from that past investment
Requirement for Balanced growth
Domar defined balanced growth as a rate of income growth at which full employment of resources is maintained over time.
The economy must grow in order to maintain full employment of its resources
To achieved balanced growth, investment must increase at a rate equal to the product of the potential average productivity of investment and propensity
Robert M. Solow
Production, Labor Force and Investment
In short run, if an increase in labor, given fixed capital stock yields diminishing return and vice versa
In long run, production function shows constant return to scale. Eg: capital and labor increase by 1 percent,output also increase by 1 percent
established aggregate production function where
technology is constant
capital stock and labor input is changes
If capital per worker is remain constant
the growth of capital stock is net investment (gross investment-depreciation)
rise in net investment (nK) must equal to the growth of labor force
the rate of growth of the capital stock (K) = the growth of the labor force (n)
Saving and Actual Investment
Saving is proportional to income (MPS=APS)
Because of net investment absorbs all saving in the economy
The Steady-State Point
The curve shape reflect diminishing return. why?
Then, multiplied by a constant saving rate, mean smaller increase in saving
Therefore, actual investment rises at diminishing rate as capital per worker increase
Each added unit of capital per worker contributes smaller added increments of output.
At a steady-safe point, actual investment=balanced investment
according to Solow, the actual investment could be either smaller or larger than balance investment
If the actual investment exceeds balanced investment, capital per worker increases and vice versa so,the economy would adjust the relative amount of capital and labor to achieve steady state point
Technological Progress
Technological progress important in order to achieve higher standard of living
In his paper work 'Technological Change and the Aggregate Production Function' 1957, the growth model showed increased in labor and capital inputs explained less than half of economic growth
Improved production techniques
Improved in quuality of labor and capital
The balance is explained from technological progress
He argued those daring spirit, entrepreneurs, created technical and financial innovation in the face of competition and falling profits
Economic Development
The key process is the innovation, and the central innovator is entrepreneur
Without innovation economic life would reach static equlibrium and its circular flow would follow essentially the same channels year after year
Schumpeter construvted a theoretical system to explain both business cycle and the theory of economic development
Decay of Capitalism
He rejected Ricardian emphasis on the role of diminishing return and malthusian population principle
Also denied Marx's contention that economic contraditions would produce sucessively more severe crises
The obsolescence entrepreneurial function
The entrepreneural function is growing obsolete,thus economic and social foundations of capitalism are crumbling
Technological progress is increasinglybecoming the business of teams of trained specialist who turn out what it required and make it work in predictable ways
Destruction of political strata
He agree with idea of Marx that big business destroys small and medium sized firm. In democratic politics,this process weakens the political position
Destruction of Instituional Framework
Ragnar Nurkse
Nurkse argued that the poor countries are to advance, they must rely increasingly on industrilization instead of primarily on production and export of raw materials
the rich countries show advances in real income per capita,yet they are not transmitting their won rate og growth to rest of the world