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Development Theories - Describe the Harrod-Domar model of growth

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Peter Marshall Development Theories 1) Describe the Harrod-Domar model of growth The model was developed independently by RF Harrod and ED Domar in the 1930's. The main principles of the model were that the rate of an economies growth depends upon the level of saving and the productivity of investment i.e. the capital output ratio. For example, if �12 worth of capital equipment produces ach �1 of annual output, a capital-output ratio of 12 to 1 exits. Using the model it is possible to describe reasons for economic growth. Economic growth depends upon the amount of labour and capital. As LDC's often have an abundant supply of labour it is the lack of capital that stifles their growth and development. More physical capital therefore generates growth. Therefore net investment leads to more capital accumulation, which generates higher output and therefore income. This higher income will therefore in turn allow higher saving levels. The key to economic growth is expanding investment levels (both fixed and human) capital using polices which encourage technological advances. Diagram of Harrod-Domar Model The above production possibility curve shows the importance of capital growth. I is the change in capital stock, K. The national income, Y, increases if consumption, C, is reduced, in the short run from Ca to Cb, to release saving, S, and resources for additional I from Ia to Ib. ...read more.


This increases the supply of labour, reduces waste of government spending on benefit and makes the economy produce closer to the PPF, thus increasing growth. Education and training removes skill shortages, improves productivity and helps use resources more efficiently thus increasing output. Privatisation and deregulation of companies removes red tape and increases competition. This increases efficiency and productivity to remain competitive and so output should increase. Supply side policies improve growth but therefore not necessarily development. Also often the policies are good in theory but difficult to impose and are often less effective than they are in theory. The type of economic growth (balanced v unbalanced) also affects government policy. Economists argue that balanced growth leads to industrialisation and hence rapid growth but often at great risks of high debts, for LDC's, due to vast amounts of money being spent on several sectors of the economy. Often unbalanced is more practicable for LDC's but would low the market to reveal bottlenecks and hence inducing investment from both the private and public sector. Also they can concentrate on industries with significant inter-industry linkages. According to the Lewis Model LDC's could increase development by transferring labour to the modern industrial sector. It was based on the assumption that many LDCs had dual economies with both a traditional agricultural sector and a modern industrial sector. ...read more.


Thus as a predictive model it is not very helpful. Perhaps its main use is to highlight the need for investment. Like many of the other models of economic developments it is essentially a growth model and does not address the issue of development in the wider context. These economic theories show that there are several ways governments can try to increase development. However many of these are hard to employ effectively and are based on the fact that they improve economic growth which is only a condition of development. Development is a broader process that includes raising living standards and poverty reduction. Economic growth may result in an improvement in the standard of living of a relatively small proportion of the population whilst the majority of the population remain poor. It is how the economic growth is distributed amongst the population that determines the level of development. Some economists argue that economic growth will eventually lead to a general improvement of peoples' living standards as trickle down occurs. Trickle down as its name suggests is the process whereby part of the population experiencing an increase in their income spend money on the domestic economy thus setting in motion the multiplier effect, which generates income for the poorer sections of the population. However there is considerable evidence from a number of countries that this process does not make any meaningful improvement to the lives of the poor. It is thus possible to have economic growth with no or little development. ...read more.

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