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Describe the Harrod-Domar model of growth and With the use of economic theory, discuss the policies a government might introduce to promote economic development. [14]

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Introduction

Elizabeth Wood Describe the Harrod-Domar model of growth [6] With the use of economic theory, discuss the policies a government might introduce to promote economic development. [14] The Harrod-Domar model was developed in the 1930's. The suggestion is made that high levels of savings are important to growth as savings provide funds, which can then be borrowed for investment purposes. The economy's rate of growth therefore depends on the level of saving and the productivity of the investments that were made. The productivity of investments can be summarised by the economy's capital-output ratio, e.g., if $5 dollars worth of capital equipment was required for $1 of annual output, the capital-output ratio 5:1 would exist. A lower ratio is more favourable, 4:1, would indicate that only $4 of capital equipment was needed to produce $1 of annual output. The model itself shows long-term growth. It tends to show that there will be no natural tendency for the economy to have a balanced rate of growth. Growth is split into different types and analysed accordingly. ...read more.

Middle

The diversity of theoretical inputs, historical experience and political expediency has meant that development economists, while using the tools of orthodox economic analysis, have nevertheless often been highly unorthodox in their approach to development problems. Most approaches however have shared a number of common concerns. Attention has been focused on the long run, with economic growth usually taking priority over considerations of static allocative efficiency. Economic growth and changes in the structure of output, employment and consumption, and patterns of trade, have been closely linked to one another. The focus has been on savings and investment and the policies and institutions required to encourage and sustain the accumulation process. The development of human resources, through expenditure on health and education, has always been seen as an important aspect of the development process. Development economists have perhaps been more prepared than others to recognise the need for, and the existence of, a variety of theoretical approaches to the study of economic development. We are able to identify three different schools of thought, orthodox, structuralist and radical. ...read more.

Conclusion

The collapse of the previously planned economies of eastern and central Europe and the former Soviet Union has further discredited the notion that resources can be allocated more efficiently by state than market. Public sectors have been over expanded. In many countries this has led to the creation of overstaffed, inefficient, loss making enterprises. Governments have allowed public spending to exceed revenue, leading to excessive borrowing, increases in money supply and aggravation of inflationary pressures, The 1980s saw a change in emphasis in development policy, with the following coming to the top of the agenda; liberalization (especially of trade), structural adjustment, and privatisation. A more limited role for government was envisaged focusing on proper macroeconomic management of the economy; the creation of an efficient regulatory and promotional framework; Investment in education and health (human capital) and infrastructure (physical capital); protection of poor and vulnerable members of society. Most development economists would now accept that governments must try to create a 'market friendly' environment in order to encourage economic development. The recognition that poor countries share common characteristics and face similar problems gives a 'unity in diversity' to the study of development problems. This should not, however, obscure their diversity and the need to design policies that reflect the often-unique characteristics of individual countries. ...read more.

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