• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Development Theories - Describe the Harrod-Domar model of growth

Extracts from this document...

Introduction

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.

Middle

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.

Conclusion

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Economics - Classical School of Thought, Keynesian School of Thought, Supply Side School of ...

    the amount of money in circulation V is the velocity of circulation of that money P is the average price level and T is the number of transactions taking place Classical economist suggests that V would be relatively stable and T would always tend to full employment.

  2. Outline the reasons why the process of industrialization in developing countries might require government ...

    The link between investment in education and a growth in GDP p.c can be shown from the use of several sets of statistics. For example the adult illiteracy rate in Botswana has continued to fall over the past decade. Adult illiteracy is defined as the percentage of people over the

  1. The Nature of Macroeconomics

    the natural resource base * Land = covers all natural resources utilised by people expanded by --> discovery of new natural resources and quality can be improved through technology * Technology lead to better methods of production and organisation and enables a more efficient use of resources * Technology increase

  2. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    As mentioned before, Yang, Min and Li (2003) also find that the three smallest EMU markets (Austria, Belgium and Ireland) became more isolated from other EMU markets after the EMU launched. Too small a market size and concern of market liquidity is for these markets an obstacle for active participation

  1. Free essay

    Do high house prices in Trafford deter key public sector workers from seeking a ...

    Many of them are environmental." [14] If house prices are higher in relation to someone's income, they will have less disposable income and then a lower standard of living. Less disposable income means the government will make less money through taxes, and they will either have to increase taxes or cut spending, which will both have major effects.

  2. Free essay

    From an economic perspective should my council do more to recycle a greater proportion ...

    This is not a valid reason as my father regularly works down the road from the nearest recycling centre and could easily take down waste there to recycle. However, yet again, my father might not have been aware of these centres, just like the household was not aware of all kerbside services.

  1. Differences between the standards of living in Slovakia and The Hague

    Having 36 percent of unemployment for a country like Netherlands is almost impossible to become realistic since it is economically very well developed. The unemployment rate shows that the SOL is much lower in Slovakia because there are people that don't have a job so they don't earn any money

  2. GDP and Growth

    However, when comparing the 'money' GDP from one year to another does not allow us to know the amount of the outputs the country has produced, as the higher 'money' GDP might not reflect more production but only a higher prices.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work