DTU Department of Economics

DEBRE TABOR UNIVERSITY

FACULTY OF BUSINES AND ECONOMICS

DEPARTMENT OF ECONOMICS

COURSE MODULE FOR THE COURSE DEVELOPMENT ECONOMICS

(Econ2071)

BY: Melkamsra A.

DEBRE TABOR, ETHIOPIA

JUNE, 2014
P.O. BOX: 272

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DTU Department of Economics

Debre Tabor University, Collage of Business and Economics, Department Of Economics

Module topic: Development Economics
Course title: Development Economics I
Course Code: Econ 2071
Credit hour: 3hrs/week
Total hours: 48
Course facilitator: Melkamsra A.
Module Description
The module is to provide a brief overview of the development and underdevelopment of nations
and outstanding development theories. It explores the principles, concepts and theories of that
have been developed and applied by economists for the study of the problems of developing
nations. In addition, it examines recent developments in theories of growth and transformation in
the context of developing economies and concentrates on key areas of concern to those
responsible for development policy. Furthermore, it will address the main challenges developing
world faces and consider alternative polices and modern approaches that may contribute to
stimulating growth and speeding economic development in less developed countries. Moreover,
it introduces the student to some of the main development issues that have contributed to the
development paths pursued by developing countries like Ethiopia.
Module Objective
Understand how to formulate, test and measure economic models to undertake /conduct research.
Acquire the fundamental developmental concepts to understand contemporary economic
problems of developing countries.

Methodology: To deliver this course to the student’s student centered approach will be
employed. To assess the student’s progress both summative and formative ways of evaluation
will be used.
Course Objective
At the end of this course students will be able to review the major theories relating to
economic development in the context of specific policies that have and might be pursued.
Learning outcome: -
At the end of this course students will be able to:

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DTU Department of Economics

 Describe the concept, origins interest, and nature of the ‘new development economics’, and
the phenomena it addresses; L2, K
 Examine the distribution of development throughout the world L3, S
 Explain the Process of Development by analysing theories of economic growth ,
development and the state of development L3, S
 Organize a variety of approaches and recent theoretical developments in the field of
economic development; L3, S
 Relate the previous and current policy discussions pertaining to economic growth, and
comparisons between developing and developed economies with respect to growth; L3, S
 Show how the concept of income distribution and equality can be quantified and
operationalised; L3, S

Teaching method
Brain storming Case study
Group discussion Interactive lecturing

Self learning

General assessment

1. Continuous assessment------------------------------------------------------------------60%

 Participation----------------------------------------------------------5%
 Individual assignment with presentation-------------------------5%
 Group assignment with presentation------------------------------5%
 Three Quizzes ( each comprising of 5%)-------------------------15%
 Two Tests (each comprising of 15%)-----------------------------30%
2. Final examination-------------------------------------------------------------------40%

Total--------------------------------------------------------------------------------------------100%

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DTU Department of Economics

Unit One:
Perspectives and Thoughts on Development and Development Economics
Unit description: - This unit deals with the Concept and definition of development and
development economics, Nature and interests in development economics, how is development
distributed throughout the world, Economic growth and development, Development Gap, and
Measurement of development. To deliver this unit to the student’s Brain storming, Group
discussion, Interactive lecturing, and Case study method of teaching will be employed. To assess
the students progress questioning and answering, quizzes, group work will be used.
Objectives: At the end of this unit students will be able to: -
1.1. Describe the Concept and definition of development & development economics.
1.2. Examine Nature and interests in development economics.
1.3. Explain Evolution of Development Economics
1.4. Differentiate Economic growth and development.
1.5. Illustrate the core values of development
1.6. Show how development is measured.
1.7. State the Obstacles of Development
1.8. Identify Basic Requirements for Development
1.9. Explain development gap
Contents
1.1. Basic conceptsand definition of development economics
1.2. The Scope and Nature of Development Economics
1.3. Interests in and Evolution of Development Economics
1.4. Economic growth and development
1.5. Three core values of Development
1.6. 1. Conventional Measures of Development and their Limitations
1.6.2. Alternative measures of level of development
 Physical Quality of Life Index,
 Human Development Index
 Human poverty Index
1.7. Obstacles to Development

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DTU Department of Economics

1.8. Basic Requirements for Development

1.9. Development Gap

1. Economics of Development: Concepts and Approaches

1.1. The Concept and definition of development and development
economics
Q. What we mean by development and development economics? (Brain storming).

Interactive lecturing: Development is the structural transformation of the economy via these
changes that are the key elements to economic growth.
What are these structural changes? The principal changes are:
 Increases in the rates of accumulation (Rostow, Lewis);
 Shifts in the sectoral composition of economic activity, whether output or employment or
factor use (Kuznets, Chenery); often called industrialization;
 Changes in the location of economic activity (urbanization);
 And such changes as the demographic transition and changes in income distribution.
Development Economics, a subject that studies the economies of the developing world, has
made excellent use of economic theory, econometric methods, sociology, anthropology, political
science, biology and demography and has burgeoned into one of the liveliest areas of research in
all the social sciences (Debraj Ray, 2007).
Moreover Development economics: The study of how economies, are transformed
from stagnation to growth and from low income to high-income status, and overcome problems
of
Group discussion and interactive lecturing
1.2. Q. what are the goals and objectives of development? (Brain storming).

The Scope and Nature of Development Economics

Q. State the Scope and Nature of Development Economics?

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DTU Department of Economics

Interactive lecturing:
In addition to deal with efficient allocation of scarce resource it deals with economic, cultural,
social, institutional system .e.g developing country
Q. What can you say about Nature of development economics? (Interactive lecturing)

Interactive lecturing: There are various aspects of development economics

Traditional economics: assumes economic rationality and a purely
materialistic, individualistic and self-interested orientation towards economic
decision making.
Political economy: studies the social and institutional process through which
certain group of economic and political elites dominates the allocation of
resources. In general the course will help students to obtain basic knowledge of the major
problems and prospects for economic development by focusing specifically on the plight of the
three quarters of the world population for whom poverty and low level of living are a fact of life.
Q. Why there is an interest in development economics? (Interactive lecturing and group
discussion)

1.3. Interests in and Evolution of Development Economics

Interactive lecturing: The focus of the world to the development problems of under
developed countries have started recently. Though the study of economic development in general
has attracted the attention of economist’s right from the mercantilist school, classical school
down to Marx and Keynes, its study as a separate subject is a relatively recent phenomenon. It is
also after the end of the II world War that the majority of the international bodies with the aim
of promoting development that exist today such as the World Bank and its affiliates, and
agencies of the UN all have been established.

Q. how development economics is evaluated? (group assignment)

1.4. Economic growth and development

Q. What is the difference between economic growth and development?

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DTU Department of Economics

Interactive lecturing
 Economic growth: is the increase in the output of goods and services of a country per
unit time
 Economic development: the capacity of the economy to generate and sustain fast growth
rate of GDP (per capital income). It is the planned alteration of the structure of
production and employment so that agriculture’s share of both declines and that of the
manufacturing and service industries increases.
1.5. Three Core Values of Development

Q. State the core values of development? ( group discussion)

Interactive lecturing
There are three core values of development.

1. Sustenance: The Ability to Meet Basic Needs. The basic goods and services, such
as food, clothing, and shelter, that is necessary to sustain an average human being at the bare
minimum level of living.
2. Self-Esteem: To Be a Person. Self-esteem is the feeling of worthiness that a
society enjoys when its social, political, and economic systems and institutions promote
human values such as respect, dignity, integrity, and self determination
3. Freedom from Servitude: To Be Able to Choose. It is A situation in which a
society has at its disposal a variety of alternatives from which to satisfy its wants and
individuals enjoy real choices according to their preferences.

Q. . What are the Three Objectives of Development? Class work

There are 3 objective of development which is correlated to corresponding core value of

development.
1. Increase and widen the distribution of basic life sustaining goods and service
2. Raise level of living through job provision, better education.
3. To expand the range of socio economic choices.
1.6 The Measurement of Economic Development And Growth

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1.6.1.Q. how growth and development is measured? group discussion(3 minute)

Conventional measure
Interactive lecturing: The dominant conventional measures of growth and
development are the Gross National Product (GNP) or Gross Domestic Product (GDP)
and their corresponding per capital values.
Limitation with GNP and GDP:
 The measures exclude non-market activities, transactions and subsistence
production
 National income accounting is also subject to a number of statistical problems
 The difficulty of international comparisons
 differences in the rate of inflation among countries
1.6.2. Alternative Development Indicators
Q. State the Alternative development Indicators other than GNP and GDP? group
discussion(5 minute)

Among the developed alternative indicators the major are:-

 The physical quality of life index (PQLI) developed by Morris (1979),
 The Human Development Index (HDI) developed by UNDP, and
 The Human Poverty Index.
A. the physical Quality of Life Index (PQLI)
What is the physical Quality of Life Index (PQLI)? (Interactive lecturing and group
discussion)
This includes:-
 Infant mortality,
 life expectancy, and
 Literacy. An equal weight is given to each of the three indictors. The PQLI of
each country is given by the following formula.
PQLI = Life expectancy index + infant mortality index + literacy index

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The PQLI indirectly reflects the effects on human development of investment in health
service, water and sewage systems, quality of food and nutrition, education, housing, and
changes in income distribution.
B. The Human Development Index (HDI)
What about the Human Development Index (HDI)? (Interactive lecturing and group
discussion)

Interactive lecturing: HDI is ranking various countries according to the relative

success they have had with the human development of their population.
Index = Actual value – Minimum value
Maximum value – Minimum value

 Life Expectancy Index =

 Education Index =

 Adult Literacy Index (ALI) =

 Gross Enrolment Index (GEI) =

 GDP Index =

Where: LE: Life expectancy

ALR: Adult literacy rate
CGER: Combined gross enrolment ratio
GDPpc: GDP per capita at PPP in USD

The index thus ranges from 0 to 1. If the actual value is equal to maximum the index is
one. The HDI ranks countries into three groups:

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 Low human development (0.0 to 0.49),

 Medium human development (0.50 to 0.79) and

 High human development (0.80 to 1.00)

For any given year, HDI measures relative not absolute level of human development and
that its focus is on the ends of development (longevity, educational achievement and
standard of living).

C. Human Poverty Index (HPI)

What are the main indices of Human Poverty Index (HPI)? (Interactive
lecturing and group discussion)
Interactive lecturing: The United Nations has constructed human poverty indices for
developing countries. The composite measure focuses on dimensions of deprivations. The HPI
for developing countries is based on three main indices:
 The percentage of the population not expected to survive to the age of 40 (P1)
 The adult illiteracy rate (P2)
 A deprivation index based on an average of three variables: the percentage of
the population without access to safe water; the percentage of population
without access to health service; and the percentage of the underweight
children under five years old (P3). The formula is given by:
HPI = [1/3(P13 + P23 + P33)] 1/3
1.7. Obstacles to Development
Q. What are the main hindrances of development?

Constraints of development in Third World countries can be divided into 4 categories:

a. Natural resources
(b)Human capital
(c) Poor infrastructure

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(d) Institutional factors

Q. illustrates how these factors hinder development?(home work)

1.8. Basic Requirements for Development

Q. state the basic requirements for development ?(group assignment)

1.9. Development Gap

It Is the difference of developed and developing GDP?
Q. What is the main cause of development gap? ( Individual assignment)

Sample question
Give brief explanation for the questions given bellow
1. What limitations do GNP and GDP has, as a measurement of development and what are
the alternatives for them?
2. What is the difference between economic growth and economic development and is there
any interdependence in between?
3. Which come first economic growth and economic development? Why?
4. Use your own example to show the application of the alternative measures of
development and interpret your result. Which measure would you believe be the best
among them?
5. Do life sustenance, self esteem and freedom have something to do with development?
Explain.

Reference Books

 Todaro, Michael, 1994, 2000, 2002, 2006. Economic Development, Fifth, six and
Seventh, 8th editions. New York. London: Longman:
 E. Wayne Nafziger (2005) Economic Development ,4th Edition Princeton University

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Unit Two
Structural Features and Common Characteristics of the LDCs
Unit description: - This unit deals with the structure of the LDCs (third world economies) and
Common characteristics of the developing nations. To deliver this course to the student’s Brain
storming, Group discussion, Interactive lecturing, and Case study method of teaching will be
employed. To assess the students progress questioning and answering, quizzes, group work will
be used.
Objectives: At the end of this unit students will be able to: -
2.1 Describe the structure of the LDCs (third world economies)
2.2. Examine Common characteristics of the developing nations

Contents
2.1 The structure of the LDCs (third world economies)
2.1 Common characteristics of the developing nations

Introduction
Least developed countries: designation of countries with low income, low
human capital, and high economic vulnerability

The structure of the LDCs (third world economies)

This section portrays the structural diversity of developing nations. With this intention we will
make an examination of eight critical components. These are:
1. The size of the country (geographic area, size of population, and income levels)
1 . Its historical and economical background
2 . It endowments of physical and human resources
3 . Its ethnic and religious composition
4 . The relative importance of its public and private sector
5 . The nature of its industrial structure
6 . Its degree of dependence on external economic and political forces
7 . The distribution of power and the institutional and political structure within the nation.

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All components will be studied in detail. In doing this we will focus on regional comparisons of
the developing countries of Africa, Asia, and Latin America and their sub regions.
2.2Common Characteristics of Developing Countries
Q. What are the common structures of LDCs? (Interactive lecturing and group discussion)?
(10 minute)

The foregoing discussions have demonstrated why it is sometimes risky to generalize too much
about such a diverse set of nations. Nevertheless common economic features of developing
countries permit us to view them in a broadly similar framework. This section portrays various
dimensions of the development gap between rich and poor countries and similarities of poor
nations. These include level and growth rate of income, unemployment and underemployment,
population growth rate, economic structure, political and institutional factors, and degree of
dependence. We will attempt to identify these similarities and provide illustrative data to
demonstrate their importance. For convenience, we can classify these common characteristics
into seven broad categories.
 Low levels of living, characterized by low income inequality, poor health, and
inadequate education
 Low levels of productivity
 High rates of population growth and dependency burden
 High and rising levels of unemployment and underemployment
 Substantial dependence on agricultural production and primary product exports
 Prevalence of imperfect markets and limited information
 Dominance, dependence, and vulnerability in international relations.

Sample question
1. Give description about the structure of the LDCs (third world economies)
2. What are the Common characteristics of the developing nations? Explain briefly
3. State the effect of low saving behaviour of LDCs on living standard?
4. State the vicious circle of poverty? And suggest the way how this problem is tackled?
Reference Books

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 Todaro, Michael, 1994, 2000, 2002, 2006. Economic Development, Fifth, six and
Seventh, 8th editions.New York. London: Longman:
 E. Wayne Nafziger (2005) Economic Development ,4th Edition Princeton University

Unit Three:
Growth models and Theories of Development
Unit description: - This unit deals with the basic Models and theories of economic development
and Historic growth and lessons learned, and the state of development theory. To deliver this
course to the student’s Brain storming, Group discussion, Interactive lecturing, and Case study
method of teaching will be employed. To assess the students progress questioning and
answering, quizzes, group work will be used.
Objectives
3.1. Explain why growth rates differ across country
3.2. Identify the Economic growth
3.3. State the growth models and theories
Contents
3.1. Facts of economic growth and why growth rates differ across country
3.2. Factors of Economic growth
3.3. Models and theories of economic growth and development
3.3.1 Linear stages of growth models
 Rostow’s stage of growth
 Harod Domar growth model
 Solow growth model
Structural change models: Lewis theory of Development
3.3.2 Dualistic Theories
a. Social Dualism
b. Technological Dualism
c. Financial Dualism
3.3.3 The process of Cumulative Causation
3.3.4 A Model of Low Level Equilibrium Trap
3.3.5 The Big-Push Theory.

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3.3.6 The Balanced Growth

3.3.7 Unbalanced growth
3.3.8 The international dependence model
3.3.9 The Neoclassical counterrevolution
3.3.10. The new growth theories
3. Growth Models and Theories of Development
3.1. Facts of economic growth and why growth rates differ across country
q. What is economic growth? (Brain storming).

Economic Growth is the rise in per capital income of the country, which is a measure of
quantity.

What are the basic questions and stylized facts about economic growth? (Group discussion
and interactive lecturing)
1. Why some countries are rich and why not others?
2. What is the source of economic growth?
3. Why some countries do experience sustained growth and why not others?
4. How can we explain the recent growth miracle?

I. Stylized facts about economic growth

1. there is high gap in per capital income across the world

2. the economic growth rates across economies vary significantly
3. The growth rates are not generally constant over time. For example, for the world
generally the rate has increased sharply since the beginning of 20 th century. The same is
also true for individual country experience
4. A country`s relative position per capital income in the world is not fixed. Countries can
move from being ‘poor’ to being ‘rich’ or vice versa.

3.2. Factors of Economic growth

q. What are the factors that influence economic growth? Individual assignment ().

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e.g Economic growth is influenced by level of population, technology, saving and so on.

3.3. Models and theories of economic growth and development

3.3.1 Linear stages of growth models
A. Rostow's stages of growth model
Discuses Rostow's stages of growth model economic development. (Group
discussion and interactive lecturing)
This model is highly influenced by American Economist called Walt W.Rostow.
According to the Rostow doctrine, the transition from underdevelopment to
development can be described in terms of a series of steps or stages through which
all countries must proceed.
Rostow identified stages of economic growth that societies have to pass through as
follows.
a. The traditional society
b. Pre-condition for the takeoff into self-sustaining growth
c. Take-off stage
d. Drive to maturity and
e. The age of high consumption-stages of self-sustained growth

Q. Explain the above areas of study with practical examples

B. The Harrod-Domar Model

Q. What is the Harrod-Domar Model all about (Interactive lecturing and group discussion)?
(10 minute)

The simplest and oldest growth model used in the analysis of economic growth and development
was developed independently during the 1940s by Ron Harrod and Evsey Domar. The
underlying assumptions of the model is that the output of any economy depends upon the amount
of capital invested (saving). Additionally, the model uses input-output relationship (production
function) where their constant rate of substitution between factors of production, and constant
s
returns to scale. According to this model growth function can be given by: gy= −δ
θ
The equation tells us that, according to Harrod-Domar model, economic growth is positively
1
related to both saving rate ( s ) and capital efficiency ( ), given the depreciation rate. At first the
θ

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model doesn’t take in to account the effect of population growth on economic growth, which was
mentioned to be its limitation initially. But, latter it has tried to include the effect of population
growth to economic growth and the equation was:
¿ s
gy = −δ−n, Where gy ¿ represents growth rate when population growth rate is considered.
θ
The equation tells us the same thing with the original (old) Harrod-Domar model. That is the
nation, given, the population growth raten and capital depreciationδ , because both are related to
output linearly, has to increase either saving rate and or efficiency of capital to grow.
C. The Solow Model

Q What Solow model says about economic growth? (Self learning and interactive

lecturing

The Solow economic growth model was developed by Robert Solow, a Nobel Prize winner
economist for his work of economic growth. The model shows how saving, population growth,
and technological progress affect the level of an economy`s output and its growth over time.
Solow model is based on two key equations; production function and capital accumulation
equation. The production exhibits constant returns to scale, diminishing productivity, smooth
substitutability between factors of production, and smooth and convex Iso-quant curve.
Basic Solow model: capital accumulation and population growth
The Solow growth model is designed to show how growth in the capital stock, labor force, and
advance in technology interact in the economy and how they affect the nation output. The simple
and basic Solow model tries to see how saving and population growth rates affect economic
growth. Here we are interested to show growth in output per worker, and assume that the labor
participation rate (the fraction of labor that participates in labor force from the total population)
is constant. Therefore labor force grows the same with that of population.
Y = F (K, L) = KαL1-α, -------------------- ( 1 )
Dividing by L through out
α 1−α
Y K L
=
L L
α −α
y=K L , where y is output per worker
y=k ---------------------------------------- ( 2 )
α

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Equation two shows whatever the economy or size of capital is there is constant and proportional
relationship between y∧k . For any given stock of capital k , the production function y=f (k)
determines how much output to be produced in the economy.
At any moment the capital stock is the key determinant of the economy`s output. But, the capital
stock can change over time, and those changes can lead to economic growth. So, we need capital
accumulation equation.
K̇=sY −δK ------------------------------------------ (3)
dK
Where K̇ , is a year to year change in stock of capital, and hence it can also be given by ∆ K =
dt
Dividing both sides by K
K̇ sY
= −δ
K K
Dividing both the numerator and denominator of the first term of the right hand side by L
K̇ sy
= −δ ----------------------------------------- (4)
K k
K
Remember thatk = , taking the natural logarthim and differentiating it with respect to time
L
(Note that the derivative of logarithm of a variable with respect to time gives its growth rate).
lnk=lnK −lnL
dlnk dlnK dlnL
= −
dt dt dt
k̇ K̇ L̇
= − --------------------------------------------- (5)
k K L
Substituting equation 4 in to 5
k̇ sy L̇
= −δ−
k k L

k̇ sy
= −δ−n
k k

k̇ =sy −( δ+ n)k ---------------------------------- (6)

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Equation 6 shows that the per capital per worker is positively related to saving and hence
investment and inversely related to per capital depreciation(δk ) and population growth rate (n )
Break even investment ( δ +n ) k refers to investment required to keep capital per worker constant.
In the figure above, it is shown that there is a single capital per worker at which actual
investment (sy ) and amount of depreciation and population break even investment. If the
economy finds itself at this level of the capital stock, the capital will not change because the two
forces acting on it actual investment and break even investment are just balance. That is at k ¿ ,
∆ k = 0, so the capital stock (k )and output y are steady over time rather than growing or
¿
shrinking. We therefore, call k as the steady state level of capital.
The steady state is defined at k̇ =0 , therefore, the steady state quantities of capital and output per
worker can be calculated as
k̇ =sy −( δ+ n)k --------------------------------------- (1)
But, y=k α
α
k̇ =s k −(δ+ n)k , at steady state k̇ =0
α
0=s k −(δ + n)k
α
s k =(δ +n)k
Dividing both sides byk α ( δ +n), we get
k s
=
k
α
(δ +n)
1− α s
k =
(δ+ n)
1
¿ s α¿
k =( ) 1−¿
(δ +n)
α
¿ s 1−¿ α ¿
y =( )
(δ+ n)

3.3.2. Structural change models: Lewis theory of Development

Definition Structural transformation: The process of transforming an economy in such a way that the
contribution to national income by the manufacturing sector eventually surpasses the contribution by the
agricultural sector. More generally, a major alteration in the industrial composition of any economy.
Lewis two-sector model: A theory of development in which surplus labor from the traditional
agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus

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labor, promotes industrialization, and stimulates sustained development.
Surplus labor The excess supply of labor over and above the quantity demanded at the going free-market
wage rate. In the Lewis two-sector model of economic development, surplus labor refers to the portion of
the rural labor force whose marginal productivity is zero or negative.
3.3.3.
Dualistic Theories
Q How is dualism is going be perceived? (Group discussion & Interactive lecturing)

Interactive lecture: Dualism indicates a situation where types of parallel phenomena

co-exist. It represents the existence and persistence of increasing divergences between
rich and poor nations and rich and poor people’s on various levels. Dualism has been
perceived in different ways such as: social, technological, financial, and geographic
dualism.
3.3.4 The Process of Cumulative Causation
Q. What the Process of Cumulative Causation is all about? (Group discussion and
interactive lecturing)

Interactive lecture: The process of cumulative causation is a hypothesis of

geographic dualism, applicable to nations and regions within nations. This can be
advanced to account for the persistence of spatial differences in a wide variety of
development indices, including employment, per capita income (PCI), rates of growth
of industrialization and trade. As such the process of cumulative causation is a direct
challenge to static equilibrium theory, which predicts that the working of economic
forces will cause spatial differences to narrow.
3.3.5. A Model of Low Level Equilibrium Trap
Q. state and explain implication of Low Level Equilibrium Trap model (Group
assignment)

3.3.6. The Big Push Theory

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Q. What is the requirement for development as to the Big Push Theory? (Interactive
lecturing)

Interactive lecture: The theory of big push is associated with the name of Paul N.
Rosentern Rodan. The theory says that a big push or a large comprehensive program is
needed in the form of a high minimum amount of investment to overcome the obstacles
for development in UDCs. According to him, launching a country into self sustaining
growth is a little like lifting an airplane off the ground. There is a critical ground speed
which must be passed before the air craft can become air borne. The theory states that
proceeding bit-by-bit investment program will not lead the economy successfully through
the development path. For sustained development, a minimum amount of investment is
necessary. Rodom distinguished three types of indivisibilities and external economies.
 Indivisibilities in the Production Function
 Indivisibilities of Demand
 Indivisibilities in the Supply of Saving
3.3.7. The Balanced and Unbalance Growth Theory
Q. Distinguish between Balanced and Unbalance Growth Theory (Group discussion and
interactive lecturing)

Interactive lecture: This theory was advocated mainly by Rosenstein-Rodan (1943),

Ragnar NurKse (1953) and Arthur Lewis (1954). Many writers view balanced growth
differently. To some writers, balanced growth means investing in a lagging sector of the
national economy or industry so as to ensure that it catches up with others. To others,
balanced growth implies that investment takes place simultaneously in all sectors of the
national economy. Still to others, it implies the balanced development of agricultural and
industrial sectors of the economy. To this extent, balanced growth calls for maintaining
the balance between the different consumer and capital goods industries. It also calls for
ensuring balance between agriculture and industry and between the domestic and export
sectors of the national economy. Additionally, it requires balance between social and
economic overheads and directly productive investment. Moreover, the economists in

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favor of the balanced growth postulated the balance between supply side and demand
side. The theory of unbalanced growth is the opposite of the doctrine of balanced growth.
The dissatisfaction with the theoretical underpinnings of the balanced growth theory gave
rise to a new school of thought that of unbalanced growth which has an intellectual as
well as a practical appeal. Mainly Walt Rostow and more particularly Albert Hirschman
were who propounded the theory in a systematic manner.
3.3.8. Surplus Labor Theory
Q What do we mean by surplus labor and how can it is related with development
(Interactive lecturing)

The theory is one of the best-known early theoretical models of development that focused
on the structural transformation of a primary subsistence economy. Lewis' model starts
with the assumption of a dual economy with a modern industrial sector and a traditional
subsistence sector. Lewis believed that in the traditional sector of many underdeveloped
countries there is unlimited supply of labor at subsistence wage.
Surplus Labor means the existence of such a large population in the rural sector so that
the marginal productivity of labor has fallen to zero. The essence of the development
process in this type of an economy is the transfer of labor resources from the agricultural
sector where they add nothing to production to the more modern industrial sector, where
they create a surplus. Economic development takes place when capital accumulates as a
result of withdrawal of surplus labor from the subsistence to the modern industrial sector.
3.3.9. The international dependence model

International-dependence models View developing countries as beset by institutional, political,

and economic rigidities, both domestic and international, and caught up in a dependence and
dominance relationship with rich countries. Within this general approach are three major
streams of thought: the neocolonial dependence model, the false-paradigm model, and the
dualistic-development thesis.
3.3.10The Neoclassical counterrevolution

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What is the implication of The Neoclassical Counterrevolution?

Neoclassical counterrevolution: The central argument of the neoclassical
counterrevolution is that underdevelopment results from poor resource allocation due to incorrect
pricing policies and too much state intervention by overly active developing-nation governments.
Impliedly, state intervention in economic activity slows the pace of economic growth.

Sample questions
1. Use your own example to explain the applicability of Harrod – Domar Growth Model and
Solow's Model of Long run Growth
2. Describe Rostow’s Stages of Economic Growth and in which stage do our country Ethiopia
is found to be
3. Lewis' model starts with the assumption of a dual economy. What is dual economy
and how it helps to describe the surplus labor theory?
4. Do the surplus theory applicable to Ethiopia?
5. What is the area of difference and similarities between the balanced and unbalanced Growth
Theory?
Given a nations production function is given as Y=K0.5 L0.5
And saving rate is 0.2, population is grown at 1%.furthermore capital is depreciated with 1%.then:

A.Determine the steady state level of capital, output, saving, breakeven investment?
B. Calculate the golden rule of capital?
C.determine the change in capital stock at steady state
D.furthermore the efficiency of the worker is improved by 0.02,then what will be
1. Steady state level of capital, output, saving, breakeven investment?
2. Calculate the golden rule of capital?
3. determine the change in capital stock at steady state
6. state the policy implications of Haro-Domar and Solow growth model

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Reference Books

 Todaro, Michael, 1994, 2000, 2002,2006. Economic Development, Fifth, six and Seventh
,8th editions.New York. London: Longman:

 Michael P. Todaro& Stephen C. Smith (2009). Economic

Development,11th e d i t i o n New York University page 89-109

chapter 3.
 E. Wayne Nafziger (2005) Economic Development ,4th Edition Princeton University

Unit Four
Historic Growth and contemporary Development: Lessons and controversies
Unit description: The unit will deals with the Rational Concept: on Approach the Economics of
growth & Development, The Historical record: Kuznets’s six characteristics of Modern economic
Growth, the limited value of the historical Growth Experience. To deliver this course to the
student’s self learning method of teaching will be employed. To assess the students’ progress
questioning and answering will be used.

Objective
At the end of this unit students will be able to: -
4.1 Explain the approaches of economic growth
4.2 Examine Kuznets’s six characteristics of Modern economic Growth
4.3. Describe the limited value of the historical Growth Experience
Content
4.1. The Economics of growth
4.1.1. Traditional Approach (Economic Factors) to Development
a) Natural Resource
b) Capital Accumulation
c) Organization

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d) Technological Progress
e) Division of Labor and Scale of Production
4.1.2. Institutional Approach to Development
a. Type of Government
b. Institutions
c. Social Structure of Population
d. Social Capital and Cultural Traits
4.2. The Historical record: Kuznets’s six characteristics of Modern economic Growth
4.3. The limited value of the historical Growth Experience: Differing initial conditions

4.1. The Economics of growth

4.1.1. Traditional Approach (Economic Factors) to Development

What are the factors that affect economic growth?

Three factors influence economic growth. Such as:
1. Capital accumulation: is the level of present income saved to augment
future output and income.
2. Growth in population: is the growth of labor force
3. Technological progress: it is resulted from new and improved way of
accomplishing tasks.
Q. Illustrate how these and other factors affect growth?
4.2.
The Historical record: Kuznets’s six characteristics of Modern economic
Growth
Q. state six characteristics of Modern economic Growth?

Interactive lecturing : kiznet isolate 6 manifestations of growt of DC

1. High rates of growth of per capita output and population.
2. High rates of increase in total factor productivity

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3. High rates of structural transformation

4. High rates of social and ideological transformation
5. Propensity of DCs to reach out to the rest world.
6. Limited spread of this economic growth to only 3rd world.

4.3. The limited value of the historical Growth Experience: Differing initial conditions
Q. what are the significant difference of post war developing countries and
currently developed nation?

There significant differences in initial conditions includs

1. Physical and human resource endowment
2. Per capital income level
3. Climate
4. Population size ,distribution& growth
5. International trade benfit

Sample questions
1. State the game of growth?
2. Illustrate How Natural Resource
b) Capital Accumulation
c) Organization
d) Technological Progress
e) Division of Labor and Scale of Production affect economic growth?
3. Explain the role of Kuznets feature of DC for development?
4. What is differing initial condition?

Reference
 Todaro, Michael, 1994, 2000, 2002, 2006. Economic Development,7th editions. New
York. Page 114-142
 E. Wayne Nafziger (2005) Economic Development ,4th Edition Princeton University

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Unit ive
Inequality Poverty and Development
Unit description: The unit will deals with the Rational Concepts of poverty and inequality,
inequality and development, Poverty and development and Measurement of income inequality
and poverty. To deliver this course to the student’s self learning method of teaching will be
employed. To assess the students’ progress questioning and answering, group work will be used.
Contents
5. 1. Concepts of poverty and inequality
5.2. Inequality and development
5.3 Poverty and development
5.4. Measurement of income inequality and poverty

5.1. The Concepts of poverty and inequality

How do you think about the basic concepts of poverty and inequality?
 Income inequality: The disproportionate distribution of total national
income among households.

 Poverty is the impossibility to meet the minimum basic need .i.e

social, biological, cultural need.

5.2. The inequality and development

Income inequality: The uneven distribution of total national income among households.

Q. state the cause of inequality?

Interactive lecturing: Inequality is due to:

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 Labor market instability

 Intellectual disparity

5.3. The Poverty and development

Q. Explain the types of poverty?

Interactive lecture: Poverty can be:

A. Relative poverty: means the poor whose income is lower than the
society. i.e it compare the poorer with richer.
B. Absolute poverty: means the subsistence is below minimum social

acceptable living condition.

C. International poverty: refers to a situation where countries cannot

obtain constant amount of minimum dollar required to meet the basic need.

Q. Explain the dimension of poverty?

Interactive lecturing
There are five dimension of poverty. Such as
i. Poverty proper: lack of asset to generate income
ii. Physical weakness: under nutrition, sickness or disability.
iii. Vulnerability: risk of becoming even poor.
iv. Social isolation: lack of access to goods and services, ignorance.
v. Powerlessness: loss of power in social, political and cultural structure.

Individual assignment: State the influence of poverty on

Q. what are the cause of poverity?
development?

Interactive lecture: Poverty is caused by

 Uneven distribution of  Disease
resource  Terrorism
 Cost of living
 Violence

5.4. Measurement of income inequality and poverty

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A.Measurement of poverty
Q. Explain the way to measure poverty?

Interactive lecture: Poverty is measured by HEAD COUNTING RATIO (HCR).It is

computed by the ratio of head counting (No of people below poverty line) to total population.
HCR= HC , where HC is head counting N is Total population
N
NB according to World Bank each individual meet their basic need getting a minimum of
$1.25
e.g suppose a nation has 100 population and 4 of them are population who get below one
dollar. Measure the poverty of the nation and interpret the meaning?
So/n. HCR= HC
N
HCR= 4 =0.04
100
Interpretation: 4% of the population lies below the poverty line.

B.Measurement of income inequality

Interactive lecture: Economists usually distinguish between two principal measures of
income distribution for both analytical and quantitative purposes: the personal or size distribution
of income and the functional or distributive factor share distribution of income.

A. Size Distributions: The personal or size distribution of

income is the measure most commonly used by economists. It simply deals with
individual persons or households and the total incomes they receive. Is distribution of
income according to size class of persons for example, the share of total income
accruing to the poorest specific percentage or the richest specific percentage of a
population without regard to the sources of that income . The measure include :

1. Kuznets ratio: is used as a measure of the degree of inequality between high and
low-income groups in a country. Is the ratio of the incomes received by the top 20% and bottom
40% of the population.

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2. Lorenz Curves Another common way to analyze personal income statistics is to construct
what is known as a Lorenz curve. It is a graph depicting the variance of the size distribution of
income from perfect equality.
3. Inequality ratio: is the measure of degree of inequality between the two extreme of very rich
&poor in a country.
4. Gini coefficient: is an aggregate measure of inequality ranging from zero to one.

B. Functional distribution of income (factor share

distribution of income) : The distribution of income to factors of
production without regard to the ownership of the factors. Instead of looking at
individuals as separate entities, the theory of functional income distribution inquires into
the percentage that labor receives as a whole and compares this with the percentages of
total income distributed in the form of rent, interest, and profit (i.e., the returns to land
and financial and physical capital).

Sample question
1. State the interrelation ship between poverty inequality and development?
2. How poverty influence income inequality?
3. Show the relationship between Lorenz curve and Gini coefficient?
4. What is the extent of relative inequality in developing countries, and how is this related to the
extent of absolute poverty?
5. Is rapid growth achievable only at the cost of greater inequalities in the distribution of
income?
6. State the consequence of extreme inequality? What will be the remedy?
7. What kinds of policies are required to reduce the magnitude and extent of absolute
poverty?

Reference Books

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 Todaro, Michael, 1994, 2000, 2002, 2006. Economic Development, 5th , 6th and 7th ,
8th,10th editions. New York. London: Longman:
 E. Wayne Nafziger (2005) Economic Development ,4th Edition Princeton University
 Michael P. Todaro & Stephen C. Smith (2009). Economic
Development,11th e d i t i o n, New York University page 201-303
chapter 5.

General reference
 TodaroM.P.&SmithS.C.(2009)Development Economics, tenth edition, New York
University.
 Ray, D. (1998) Development Economics, Princeton UniversityPress.
 Gillis, DwightH. Perkins, MichaelR., Donald R. and Snodgrass, W.W. (1996) Economics
of Development, Malcolm. Norton &Company.
 Meier, Gerald, M. andJames E. Rauch(2000)Leading Issues in Economic Development,
Seventh edition, Oxford UniversityPress:New York and Oxford.
 Ghatak,S.(1995)IntroductiontoDevelopmentEconomics,Thirdedition,Routledge: London.
 Basu, Kaushik(1997) Analytical Development Economics: The Less Developed Economy
Revisited, TheMIT Press:London.
 Thirlwall,A.P.(2003)GrowthandDevelopment:WithspecialreferencetoDeveloping
countries, Seventh edition, PalgraveMacmillan, UK.
 Deaton,Angus(1997)TheAnalysisofHouseholdSurveys:AMicroeconometricApproachtoDe
velopment Policy, theWorld Bank, theJohn Hopkins UniversityPress:Baltimore.

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