Transcript TodaroSmith_EconDev_..

Chapter 3
Classic Theories
of Economic
Growth and
Development
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Chapter 3: Summary Outline:
Theories of Economic Growth & Development
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Linear Stage of Growth (Harrod-Domar Model
Structural change theories (Lewis Model)
International –dependence revolution (Marxist/Radical Model)
Neoclassical-free market re-surgence
Can differences in thinking be re-conciled?
Explaining Growth- Application of Production Possibilities Curve (PPC)
Illustrating growth using PPC, efficiency, trade offs ,technological
change
• New Growth Theory-Solow Model ( labor quality or human capital).
• What about institutions. They are ignored in these models.
• Measuring Development (Perkins chapter 2)
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Class Theories of Economic
Development – Four Approaches
• Linear stages of growth model
• Theories and Patterns of structural change
• International-dependence revolution
• Neoclassical, free market counterrevolution
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Development as Growth and
Linear-Stages Theories
• Rostow’s Stages of Growth: Historical
stages
• Harrod Domar Growth Model: Emphasis on
Physical Capital.
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The Harrod-Domar Model
S  sY
(3.1)
I  K
(3.2)
K  kY
(3.3)
SI
(3.4)
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The Harrod-Domar Model
S  sY  kY  K  I
(3.5)
sY  kY
(3.6)
Y s

Y
k
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(3.7)
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Criticisms of the Stages Model
• Necessary versus sufficient conditions
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Structural-Change Models
• The Lewis two-sector model
• Modern and traditional sector
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Figure 3.1 The Lewis Model of ModernSector Growth:Two-Sector SurplusLabor Economy
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Criticisms- Lewis Model
• Rate of labor transfer and employment creation may not be
proportional to rate of modern-sector capital accumulation.
Growth in modern sector may not draw enough labor.
• Surplus labor in rural areas and full employment in urban?
• Institutional factors? These assumptions are not correct.
• Assumption of diminishing returns in modern sector
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Figure 3.2 The Lewis Model Modified
by Laborsaving Capital Accumulation:
Employment Implications
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The International-Dependence
Revolution: Radical/Marxist Model
• The neoclassical dependence model
– Unequal power, core-periphery
• The false-paradigm model
– Using “expert” advisors
• The dualistic-development thesis
– Superior and inferior elements can coexist;
– center-periphery (sociologist’s view)
• Conclusions and implications
– No insight on development, empirical evidence
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The Neoclassical Counterrevolution:
Market Resurgence
• Challenging the statist model
– Free market approach
– Public choice approach
– Market-friendly approach
• Traditional neoclassical growth theory
– Solow model
• Conclusions and implications
– institutional and political realities in developing world
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Theories of Development:
Reconciling the Differences
• Development economics has no universally
accepted paradigm? But everything does not go?
• Insights and understandings are continually
evolving: Lessons from experience & history
• Each theory has some strengths and some
weaknesses:
• But there are better theories tested with reality of
evidence and experience
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Case Study: South Korea and
Argentina
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Concepts for Review
• Autarky
• Dominance
• Average product
• Dualism
• Capital-labor ratio
• Capital-output ratio
• Center
• False-paradigm model
• Free market
• Closed economy
• Free-market analysis
• Comprador groups
• Harrod-Domar growth
• Dependence
model
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Concepts for Review (cont’d)
• Lewis two-sector
model
• Neocolonial
dependence model
• Marginal product
• New institutionalism
• Market-friendly
approach
• New political economy
approach
• Necessary condition
• Open economy
• Neoclassical
counterrevolution
• Patterns-of
Development analysis
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Concepts for Review (cont’d)
• Periphery
• Production function
• Public choice theory
• Savings ratio
• Self-sustaining growth
• Solow neoclassical
growth model
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• Stages-of-growth
model of development
• Structural-change
theory
• Structural
transformation
• Sufficient condition
• Surplus labor
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Concepts for Review (cont’d)
• Traditional neoclassical growth theory
• Underdevelopment
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Appendix 3.1: Components of
Economic Growth
• Capital Accumulation, investments in physical and
human capital
– Increase capital stock
– GNP= Q(L,K)= F(L,K)
• Growth in population and labor force
• Technological progress
– Neutral, labor/capital-saving, labor/capital augmenting
– GNP= F(L, K, T)
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Figure A3.1.1 Effect of Increases in Physical
and Human Resources on the Production
Possibility Frontier (PPF)- Model
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Figure A3.1.2 Effect of Growth of Capital Stock and
Land on the Production Possibility Frontier (PPF):
Explaining Economic Growth
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Figure A3.1.3 Effect of Technological
Change in the Agricultural Sector on
the Production Possibility Frontier
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Figure A3.1.4 Effect of Technological
Change in the Industrial Sector on the
Production Possibility Frontier
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Appendix 3.2: The Solow Neoclassical
Growth Model: Considers human
capital or labor quality & productivity
 1
Yi  AKi Li K
Y  AK

   1
L
n
g n 
1     
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Appendix- Solow Growth
Model
k  sf (k )  (  n)k
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(A3.2.4)
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Appendix- Solow Growth
Model
sf (k *)  (  n)k *
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(A3.2.5)
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Figure A3.2.1 Equilibrium in the
Solow Growth Model
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Figure A3.2.2 The Long-Run Effect of
Changing the Saving Rate in the Solow
Model
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Appendix 3.3: Endogenous Growth
Theory: Accounts for labor quality,
technology, productivity
• Motivation for the new growth theory
• The Romer model
 1
Yi  AKi Li K
Y  AK

   1
L
n
g n 
1     
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