ASSIGNMENT SOLUTION GUIDE

SESSION: (2017-2018)

MEC-04
ECONOMICS OF GROWTH AND
DEVELOPMENT
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ANSWERS
SECTION-A
Q1. Critically examine the basic formulations of the Harrod-Domar model of economic
growth. How does the Harrod model explain the occurrence of trade cycles?
ANS.
The basic formulations of the Harood-Domar Model of economic growth are summarized as follows: -

(i) Investment is the central theme of the HDM. It plays a dual role. On the one hand it generates
income and on the other it creates productive capacity.

(ii) The increased capacity results in greater output and greater employment, depending on the
behavior of the income.

(iii) Condition regarding the behavior of income can be expressed in terms of growth-rates i.e , G, Gw
and Gn. The equality between these growth rates would ensure full employment of labour and full
utilization of capital stock.

(iv) These conditions, however, designate only a steady-line of growth. The actual growth rate may
differ iron the warranted growth rate. If the actual growth rate is higher than the warranted rate of
growth, the economy will experience cumulative inflation. If the actual growth rate is lower than the
warranted growth rate, the economy will hurtle towards cumulative deflation.
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(v) The business-cycles are viewed as the deviations from the path of steady growth. These deviations
cannot go on indefinitely. There are constraints on upper and lower limits. The “full employment ceiling”
acts an upper limit and autonomous investment and consumption act as a lower limit. The actual growth-
rate fluctuates between these two limits.

Harrod has used his model to explain trade cycles. In the recovery phase, because of the existence
of unemployed resources, G>Gn. When full employment is reached G = Gn. If Gw exceeds Gn at the full
employment, slump is inevitable. Since G had to fall below Gw, it will, for the time being, be driven
progressively downwards. Further, G itself fluctuated during the course of the business cycle. Savings as
a fraction of income, though fairly steady in the long run, fluctuate in the short run. In the short run,
savings tend to be residual between the earning and normal consumption. Companies, also, are likely to
save large portion of their short-period increased in net receipts. Thus, even if Gw is normally below Gn,
it is likely to ride above Gn in the later stages of advance, and, if it so happens, a vicious spiral of depression
is inevitable when full employment is reached. If Gw does not ride above Gn in the course of advance,
there would be continued pressure to advance when full employment is reached; this would lead to
inflation and consequently, sooner or later, to a rise of Gw above Gn, resulting ultimately into a vicious
spiral of depression. Actually, G may be reduced before the employment is reached because of immobility,
frictions, and bottlenecks and, if it so happens, depression may come before full employment is reached.
If Gw is far above Gn, G may never rise far above Gw during the revival and the depression may result
long before full employment is reached.

Q2. Discuss the concept of Golden Age Equilibrium in Joan Robinson’s model. What are
its main criticisms.
ANS.
The situation of smooth steady growth with full employment arising out of the equality of the ‘desired’
and ‘possible’ rates of accumulation has been designated by Mrs. Robinson as the ‘golden age’
equilibrium.
Suppose Q is constant under the conditions of full employment, then from the equation K/N = Q, we get
K = QN
: . ΔK = ΔNQ
Or ΔN = ΔK/Q
Or ΔN/N = ΔK/Q/N = ΔK/Q/K/Q (.: N = K/Q)
Or ΔN/N = ΔK/K - (i)

Eqn (i) implies that if Q is constant at the full employment level, their labour and capital grow at the same
rate. This is the situation of ‘golden age’ equilibrium. The equality between the desired and possible rates
of accumulation coexists with full employment of labour and capital. Besides, both labour and capital
grow at the same rate. The economy is thus on a tranquil steady growth path – “a steady rate of
accumulation than rolls smoothly on its way”.

Stability of ‘Golden Age’ equilibrium: if certain forces operate so as to disturb the ‘golden age’ equilibrium
of the economy, equilibrating mechanisms automatically comes into being to restore the equilibrium.
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The divergence from the ‘golden age’ equilibrium path will take place if:

(a) ΔN/N > Δ K/K

(b) ΔN/N < ΔK/K

In case (a) the population will grow faster than the capital stock. This, signifies the situation of
underemployment with the prevalence of surplus labour, money wage rates get depressed.
In case (b) the rate of population growth falls short of the growth rate of capital-stock.

Limping golden age. Under this age, steady rate of accumulation coexists with unemployment.

Leaden Age. It is a special case of a limping golden age in which the degree of unemployment is
increasing due to inadequate rate of accumulation.

Restrained golden age. This is an age of full employment but the desired rate of accumulation
happens to exceed the possible rate determined by the rate of growth of labour force plus the rate of
technological progress.

Bastard golden age. It denotes a situation where unemployment prevails but the real wages
remain rigid downwards.

Its main criticisms are as follows: -

· Only the various forms of Growth Process. This model provides only a frame work for
studying the various forms of growth process. The different types of growth that have been analysed are
left as isolated islands in her model.

· Mrs Robinson studies that the prime variable of her model, viz. the rate of capital accumulation
gets adjusted to the population growth via adjustments in wage rate, profit rate and labour productivity.
This tantamount to suggest redistribution of income through relative factor prices, but it would be more
practical and realistic to deploy fiscal and monetary measures for making adjustment in capital growth
with population growth.

· Neglects Role of State. In her model state has been completely left out of picture. It is indeed
unrealistic and precarious to rely solely on the private entrepreneurs for the achievement of a stable
growth of the economy in tune with the requirements of a growing population and rapidly changing
technology.

· Wrong Assumption of constant technique. This model is carried out under the assumption of a
given and constant technological horizon, but is unrealistic.

· It neglect the institutional factors as social cultural and institutional changes, on which the
development of the economy considerably depends.

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 SECTION-B
Q3. Distinguish between economic growth and development. Briefly mention the main
benefits that economic growth confers upon society.

ANS.
Economic Growth refers to the rise in the value of everything produced in the economy. It implies the
yearly increase in the country’s GDP or GNP, in percentage terms. It alludes to considerable rise in per-
capita national product, over a period, i.e. the growth rate of increase in total output, must be greater
than the population growth rate.

Economic Growth is often contrasted with Economic Development, which is defined as the increase in
the economic wealth of a country or a particular area, for the welfare of its residents. Here, you should
know that economic growth is an essential but not the only condition for economic development.

The economic trend in a country as a whole, is the major component for its business environment. An
economy whose growth rate is high provides a promising business prospect and thus builds business
confidence. In this article, you will find all the substantial differences between economic growth and
economic development.

fundamental differences between economic growth and development are explained in the points given
below:

1. Economic growth is the positive change in the real output of the country in a particular span of
time economy. Economic Development involves a rise in the level of production in an economy
along with the advancement of technology, improvement in living standards and so on.
2. Economic growth is one of the features of economic development.
3. Economic growth is an automatic process. Unlike economic development, which is the outcome
of planned and result-oriented activities.
4. Economic growth enables an increase in the indicators like GDP, per capita income, etc. On the
other hand, economic development enables improvement in the life expectancy rate, infant
mortality rate, literacy rate and poverty rates.
5. Economic growth can be measured when there is a positive change in the national income,
whereas economic development can be seen when there is an increase in real national income.
6. Economic growth is a short-term process which takes into account yearly growth of the
economy. But if we talk about economic development it is a long term process.
7. Economic Growth applies to developed economies to gauge the quality of life, but as it is an
essential condition for the development, it applies to developing countries also. In contrast to,
economic development applies to developing countries to measure progress.
8. Economic Growth results in quantitative changes, but economic development brings both
quantitative and qualitative changes.
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 9. Economic growth can be measured in a particular period. As opposed to economic development
is a continuous process so that it can be seen in the long run.

The benefits of economic growth include:

1. Higher average incomes. This enables consumers to enjoy more goods and services and enjoy better
standards of living. Economic growth during the Twentieth Century was a major factor in reducing
absolute levels of poverty and enabling a rise in life expectancy.

2. Lower unemployment. With higher output and positive economic growth, firms tend to employ more
workers creating more employment.

UK unemployment rises during a recession – falls during periods of economic growth.

3. Lower government borrowing. Economic growth creates higher tax revenues, and there is less need to
spend money on benefits such as unemployment benefit. Therefore, economic growth helps to reduce
government borrowing. Economic growth also plays a role in reducing debt to GDP ratios.

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A long period of economic growth in the post-war period helped reduce the UK debt to GDP ratio.

4. Improved public services. With increased tax revenues the government can spend more on public
services, such as the NHS and education e.t.c.

5. Money can be spent on protecting the environment. With higher real GDP a society can devote more
resources to promoting recycling and the use of renewable resources

6. Investment. Economic growth encourages firms to invest, in order to meet future demand. Higher
investment increases the scope for future economic growth – creating a virtuous cycle of economic
growth/investment.

7. Increased research and development. High economic growth leads to increased profitability for firms,
enabling more spending on research and development. Also, sustained economic growth increases
confidence and encourages firms to take risks and innovate.

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 Q4. Explain the concept and implications of globalisation . Also discuss its advantages
and shortcomings.
ANS.
Globalization means to make global, that is worldwide, or effecting or taking into consideration the whole
world or all people.
Globalization in its totality implies the following:
· There is a spread of international trade.
· People migrate from one country or region to another
· Money or means of payment are exchanged on an increasing scale between countries or regions.
· Capital flows from one country to another to help produce goods and services.
· Finance-not necessarily linked to the production of goods and services – flows between different
countries.
· Traditional corporations arise which increasingly engage in the activities listed so far.
· Technology is traded as between different countries.
· Spread of print and electronic media.
· Growing in trade and production of services of all kinds.

Advantages of Globalization are:

· It helps improve the allocative efficiency of resources, reduce the capital output ratio and increase the
labour productivity, help to develop the export spheres and the export culture, increase the inflow of
capital and updated technology into the country, increase the degree of competition in the domestic
economy, reduce the relative prices of industrial and manufactured goods, improve the terms of trade in
agriculture and, in general, give a boost to the average growth rate of the economy in the years to come.
· It helps to restructure the production and trade pattern in a capital-scarce labour abundant economy in
favour of labour-intensive goods and labour-intensive techniques.
· With the entry of foreign competition, the aggregate gross and net investment proportions to GDP will go
up.
· Efficiency of banking and financial sectors will increase with the opening up of these areas of foreign
capital and foreign banks.

Shortcomings of globalization are:

· The speed at which capital moves across borders, the rapid evolution of management and marketing
requirements, increase the pressure for structural and conceptual restructuring to a breaking point.
· Globalization process is in essence a tremendous redistribution of economic power at the world level
which will increasingly translate into a redistribution of political power.
· In the globalization economics of the world are ironically moving away from one another more than
coming together.
· Globalization process challenges some familiar assumptions. Technological changes have eliminated more
firms than they have created.

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Q5. Critically evaluate the theory of critical minimum effort. Also bring out its
limitations.
ANS.
The theory of critical minimum effort is associated with the name of Harvey Leibenstein. The theory is
based on the relationship between the three factors, viz. (i) per capital income, (ii) population growth,
and (iii) investment. Leibenstein identified population as an income-depressing factor (or a ‘shock’),
whereas investment is and income-generating (or a ‘stimulant’). Growth in an economy is possible when
the income-generating factors turnout to be more powerful than the income-depressing factors. A small
additional investment may generate a small income. The additional income would be eaten up the
additions to the populations which may come in the wake of the additional income, and hence the effort
may fail to generals a cumulative process of growth. An initial large volume of investment may outweigh
the growth of population problems. The theory is criticized on the following grounds:

(i) Leibenstein assumes that population increases as the income rises above the subsistence level.
Beyond a particular level of income, population declines. This assumption implies that rise in income has
a direct bearing on the growth of population. But, in reality, this relation is not so simple. Growth of
population is influenced by social attitudes, customs traditions of the people and not merely by the per
capital income.

(ii) The functional relation between per capital income and income growth rate is not as simple as
assumes by Leibenstein. It is complex and has two stages. In the first state, the level of per capita income
influences the rate of saving and investment which, in turn, depends on the pattern of income distribution
and the effectiveness of financial institutions in mobilizing saving. In the second stage, the relation
between investment and resultant output depends upon the economic and social system of the country.
The relationship can be improved through innovations. The meaningful innovation is possible when
updated technology, skilled labour and necessary infrastructure in the country. However, there are not
available in the initial phase of development.

(iii) In underdeveloped countries external forces play an important role in the initial stages of
development. This theory does not explain clearly the role of external forces like foreign capital, foreign
trade, international economic relations etc. These forces exert a vital impact on development and these
factors play an important role in the development process.

Q6. Explain the meaning of planning as an instrument of resource allocation. Why is

there a need for planning in the development process?
ANS.
Planning can be defined as a consciously directed activity with predetermined goals and predetermined
means to carry them out. It is an instrument or technique or mechanism whereby the use pattern of
resources is carried out. Two basic elements of planning are (i) the goals and (ii) the means.

(i) In a plan there may be one or more goals. In case there are many goals, they need to be placed in
order of their importance to the economy.

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 (ii) The means are broadly constituted of two elements: policies and instruments.
· The policies describe the outlines of actions for the fulfillment of plan goals.

· The instruments may be defined as the qualitatively and quantitatively defined means of action by which
it is intended to achieve the plan goals. These instruments are the means by which planned resources are
matched with planned requirements.

The various economic factors that make it imperative that economic planning be adopted as an
instrument of resource allocation are as follows:

(i) Since resources, whether natural, material, capital or human, are severely limited, planning
provides a method of rational and considered choice for securing the optimum combination of inputs.

(ii) Planning help to identify those deficiencies in the economy and the social structure which demand
the largest attention.

(iii) A plan for mobilizing resources and savings is a necessary counterpart of the scheme of investment.

(iv) The processes associated with planning and the implementation of plans enlarge the scope for
public participation and cooperation.

(v) A role for government planning is thus called for to ensure that potential free-riders play their part.

(vi) As planning techniques improve and more precise statistical data become available, the inter-
relationship within the national economy can be seen more clearly and to that extent the effects of
different policies and measures can be traced systematically.

Q7. Compare and contrast the Uzawa two-sector growth model with the Feldman model.

ANS.
Hirofumi Uzawa's two-sector growth model considers a Solow-Swan type of growth model with two
produced commodities, a consumer good and an investment good. Both these goods are produced with
capital and labour.

So we have two outputs and two inputs, of which the most interesting feature is that one of the outputs
is also an input. To use the old Hicksian analogy, in the Uzawa two-sector model, we are using, labour and
tractors to make corn and tractors. For the following exposition, we have benefited particularly from
Burmeister and Dobell and Siglitz and Uzawa.

Now, we assume no barriers competition in the factor markets, so that there is free movement of labour
and capital across sectors. This implies that the wage rate w and the profit rate r must be the same in both
the consumer goods and investment goods industry.

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Grigory Alexandrovich Feldman, an electrical engineer by profession, worked in Gosplan from 1923 until 1931. His
report to the committee for long-term planning of Gosplan, entitled "On the Theory of the Rates of Growth of the
National Income," was published in 1928 and became the basis for the committee's preliminary draft of
a long-term plan.
Feldman's two-sector growth model was based on the macroeconomic concepts of Karl Marx. Feldman
first demonstrated that the higher the aggregate growth of an economy, the more capital had to be
devoted to the producers' goods sector.
Net investment would have to be proportional to the existing allocation of capital. The greater the
capacity to produce capital goods, the faster the economy could grow, according to the model. Capital-
output ratios in the two sectors could be minimised by working several shifts.
This early growth model, however, ignored likely scarcities of food, foreign exchange, and skilled labour
that would result when growth accelerated. A double dip recession, which occurs when GDP growth turns
negative after at least a quarter or two of positive growth, isn't something to take lightly.
There's only been one since the Great Depression, in 1981. It can have a devastating impact on households
and businesses, knocking them off their feet again after just emerging from a recession. Many double dip
recession advocates have created successful marketing businesses by promulgating worst case scenarios.
While their message delivery is certainly intended to capture media attention, many of their arguments
are not entirely unfounded. The recovery has been slow to gain traction in housing and employment and
the Fed has little room remaining to stimulate the economy, given that interest rates are already near
zero.
Still, there are continued signs of encouragement. Businesses are starting to hire and the economy has
been adding jobs since the beginning of the year. And while home sales dropped substantially in May
following the expiration of the federal homebuyer credit, the rate of homeowners going into foreclosure
has slowed and housing prices are likely near a bottom.
For double dip recession proponents there is no sugar- coating the news; the May employment report
was terrible with the economy only creating 41,000 private sector jobs. To recover the 8.4 million private
sector jobs lost from December 2007, at a rate of41,000 jobs per month, it would take over 17 years.
For sure, even the most dire pessimists are not arguing that we will only create 41,000 private sector jobs
per month, but this is merely an indication of how bad the employment situation remains.
To merely keep up with population growth, the economy needs to generate 100,000 jobs a month, and it
wasn't even close in May. Even worse, the average length of unemployment continues to increase and is
now up to a staggering 34.4 weeks.
Almost one half (46%) of the unemployed have been without work for over 27 weeks, almost doubling
the previous high of 26%. The longer a worker is without a job, the harder it is to find one. In addition,
millions of Americans remain too discouraged to even look for a job; if they were looking for work,
unemployment numbers would be even worse.

Jobless claims also rose for the second week in June and the four-week moving average of unemployment
claims, which smoothes out the variations in the weekly data, was flat. The level of jobless claims remains
high and could signal that an earlier recovery in employment is fading.

Observers who see economic recovery believe that, while the May numbers for job creation and the early
June numbers for unemployment are not all that encouraging, they are not catastrophic either.

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In its June 23 release, the Fed stated that the labour market "is improving gradually," an upgrade from
"beginning to improve" in the April statement. Economic recoveries are never linear and employment
improvement typically lags.
There are positive signs that employment is recovering. At the beginning of 2010, 100,000 new jobs were
created a month, on average, and that figure rose to around 140,000, on average, over the past three
months. If this trend is sustained, it will mean moderate job growth for the economy.
Manufacturing employers added to their payrolls for the sixth consecutive month in May, according to
the Institute for Supply Management (ISM). Hours worked are trending up and are 1.2 per cent above
their mid-2009 low. In addition, labour input is rising much faster as private employment trends up.
As hours increase, after-tax wage and salary income will grow, contributing to an economic recovery. In
addition, job openings have increased over the past few months. An end to the fiscal stimulus plan does
not necessarily translate into further employment deterioration.
Much of the stimulus was focused on unemployment benefits and aid to states, both designed to offset
the impact of lost jobs. Net layoffs have halted and personal income is trending higher, setting the stage
for improvement in the overall employment situation, if only incremental.
Feldman delineated five ways in which part-time work could be differentiated, two of which are examined
in this research. Part time work can be permanent or temporary; and, sourced directly from an
organisation or indirectly through an employment agency.
Permanent part-timers work fewer than 35 hours per week on a continuous basis in the same
organisation, while temporary workers are hired for limited periods of time to deal with fluctuating
workloads or short- term personnel shortages.
Part-timers can source their work directly from an organisation and be paid by the same organisation. Or,
they could get their job assignments through an employment agency, in which case they will be paid by
the agency. Job attitudes and behaviours among part-timers differ across different part-time work
arrangements.
Generally, temporary part-timers display the poorest job attitudes and lowest commitment to their
organisations. On the other hand, because of the sustained contributions they make to their employers,
permanent part-timers are viewed as more valuable. They tend to get higher wages, more fringe benefits
and greater job challenge and hence display better job attitudes.
Therefore, we predicted that permanent part-timers experience higher levels of job satisfaction, work
motivation, and lower level of intention to turnover compared to temporary part-timers. Feldman
suggested that it is unlikely for employment agencies to invest in training for part-timers who are on their
payroll, while organisations are likely to do so.
The short-term nature of their job assignments makes it uneconomical for agencies to invest in training
part-timers. On the other hand, organisation- hired part-timers generally stay with the same employee
for a longer period. It therefore makes sense for them to invest in training to improve the part- timers'
skills and help them integrate into the work group.
Feldman's suggestion regarding the contrasting attitudes of agencies and organisations toward training
of part-timers certainly holds true in the Singapore context.
As part-timers are likely to view training as beneficial to their career development, we hypothesised that
organisation-hired part-timers experience higher levels of job satisfaction, work motivation and lower
level of intention to turnover compared to agency- hired part-timers.

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