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Theories of Planning & Planning
Models
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Economic Growth
Measuring economic growth Economic growth is measured as a percentage
change in the Gross Domestic Product (GDP)
or Gross National Product (GNP).
http://en.wikipedia.org/wiki/Gross_Domestic_Producthttp://en.wikipedia.org/wiki/Gross_National_Producthttp://en.wikipedia.org/wiki/Gross_National_Producthttp://en.wikipedia.org/wiki/Gross_Domestic_Product -
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Classical economics - the first modern school
ofeconomic thought.
Major developers include Adam Smith, Jean-
Baptiste Say, David Ricardo, Thomas Malthus
and John Stuart Mill.
http://en.wikipedia.org/wiki/History_of_economic_thoughthttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/History_of_economic_thought -
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Various theories on economic growth
Classical growth theory
"the wealth of nations". Whereas they stressed
the importance of agriculture, Smith
Manufacturing was central to the entire economy
David Ricardo argued that trade was a benefit to
a country, because if one could buy a good more
cheaply from abroad, it meant that there wasmore profitable work to be done here.
"comparative advantage FREE TRADE
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Classical Model
The foundation for the Classical Model is threebasic ideas:
1. Output is produced by capital and labor,
2. Capital is fixed in the short run, and
3. Supply and demand for labor determine
the amount of labor hired.
Implies no unemployment.
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Two versions of the Classical Model.
Both explore the properties of an economy whereunemployment is assumed not to be an importanteconomic issue.
A Simple Classical Model
Formulated in the spirit of the Simple Keynesian Model .
The simplification is an assumption that labor supply isfixed rather than a function of the wage rate.
http://www.econmacro.com/keynesian/simple_keynesian_model.htmhttp://www.econmacro.com/keynesian/simple_keynesian_model.htm -
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The Classical Model
The supply of labor is an upward sloping,
Not vertical function of the real wage rate. Aggregate supply and demand diagram and
The classical economists did not totally disregardthe role of aggregate demand.
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The Production Function and the Demand for
Labor
In the classical production function, output Y
is taken to be a function of capital K and labor
N
Y = f(K,N).
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Demand for Labor
Marginal product of labor is dY/dN = MPN,Decreasing function ofY.
MPN = W/P. The MPN curve thus is the demand for
labor.
The Supply of Labor
The supply of labor is an increasing function of the
real wage rate.
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Aggregate Supply and Demand
Equilibrium in aggregate supply and aggregate
demand determines the price level P.
Aggregate Demand
The classical aggregate demand is based on M= k P Y, where k is a constant because the
velocity of money.
http://www.econmacro.com/foundations/markets/aggregate_output/aggregate_demand.htmhttp://www.econmacro.com/foundations/markets/aggregate_output/aggregate_demand.htm -
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SUMMARY
If market forces demand & supply allowed to
play freely in the market ;
Always Full employment in long run.
No over production / under production.
Economy always in equilibrium in long run.
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SCHUMPETER THEORY Joseph Schumpeter's main concern -economic development,
closely associated with innovation.
Innovative entry by entrepreneurs --force that sustained long-termeconomic growth,
Destroyed the value of established companies that enjoyed somedegree ofmonopoly power.
Barriers to entry-- monopolies enjoyed, new entrants -radicallydifferent:
Fundamental improvement was achieved, not a mere difference ofpackaging.
The threat of market entry would keep monopolists andoligopolists' disciplined and competitive, --innovative quality .
focusing on the unexpected, rapid spurts of entrepreneur-driven
growth.
http://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Entrepreneurshttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Entrepreneurs -
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Developed a model in 2 stages:
First Approximationinitial impact ofinnovatory ideas.
Second Approximationeffects created by theapplication of innovations.
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First Approximation
Starts with economic system in equilibrium.
No incentive for additional investment.
Equilibriumnew technique /processfinanced through bank credit.
No surplus Equilibrium.
Additional fundsbanking system---bid highprice for inputs
Price rises.
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Firm imitate innovationaccelerates price rise.
Output flows into marketPhase of expansion.
Beyond certain limitincreased outputdecreased price.
Further innovations needs time ,so repayment---
contraction in money supply. Price falls further---Recession begins continues
until equilibrium.
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Second Approximation
Analyses secondary waves created by 1st.
Main elementSpeculation.
When primary wave of expansion begins.
Existing firms borrow heavily.
When prices fallsindebtedness ,problem.
Causes depression.
Recovery possible,when?
Liquidation of assets built on borrowed funds.
Inefficient firms eliminated.
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Drawbacks
Innovationone of the factors causing
fluctuations.-not sole factor.
Sociological based arguments-rather than
economic factors.
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Rostows Growth Theory Stages of Economic Development
The stages of economicdevelopment ,best-known model foreconomic growth- proposed by WaltRostow (1960's).
A country goes through five stagesas the country's economy develops.
Rostow's model presents only one
explanation for variations in theeconomic development and qualityof life of different countries.
Europe and North America.
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"The Stages of Economic Growth", (1950).
Controversial, Rostows theory has lasted
decades .
Helps to make an impact on how countries are
classified. "The Stages of Economic Growth"
outlines five stages that a country goes
through in order to develop its economy.
Below are those five stages.
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5 St t E i D l t
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5 Stages to Economic Development
Stage 1: Traditional Society
- Countries in this stage have an economydominated by subsistence agriculture.
- Due to the domination of agriculture, they haveseverely limited potential for both economic and
population growth.
- Both social and economic progresses are limitedby natural controls such as droughts and outbreaks
of disease. - Government structures are often feature are
inflexible because they are used to operating inconditions that change very little over centuries.
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Stage 3: Economic Takeoff - A country has reached this stage when their economy
starts to change dramatically in response to the
introduction of important technological innovations.
- The agriculture changes from primarily subsistence to
primarily commercial and manufacturing becomes a
more important part of the economy. The tertiary
sector of the economy expands in response to thegrowth of cities and the number of paid workers who
become customers for service providers.
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Stage 4: The Drive to Maturity
- When a country reaches this stage it is when thereis an extended period of sustained growth.
Economic gain outpaces population growth, so per
capita wealth increases. The economy becomesmore diversified with a continued expansion of
manufacturing and a variety of services.
- Here is when the modern, efficient productionmethods came into use and by now an increasing
percentage of the nations wealth is invested in
developing the economy.
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Stage 5: High Mass Consumption
- In this stage, many people have incomes that are
greater than necessary for buying essentials such as
shelter, food, and clothing.
- As a result, there is a growing demand foradditional consumer goods and services. Also the
society is wealthy enough to invest in social
programs such as improved health care systems andeducational opportunities.
Positive and Negative Impacts
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Positive and Negative Impacts
of Rostow's ModelRostow's model provdes mile stones ,to be
achieved in order for development and growthto happen in an economy.
Issues
Firstly, this model is reflected towards
European and North American economies
which provides a bias opinion.
A model that is more relevant to just
important, wealthy or prominent areas only.
Secondly, this model creates limitations to
growth and development.
It does not outline specifics, but rather
highlights the key of investment , growth to
Positive and Negative Impacts of Rostow's Model
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Lastly, within his model, there is not much room to steer
away from the specific stages.
Rostow implies that an economy must go through stage 2
before stage 3, which may not be the case. Also, an economy
might only develop in one aspect rather than all, which couldcause it to experience more growth in one area, but still be
hindered and limited in another.
In conclusion, Rostows model relies on specific conditionsfor economic growth and development rather than focusing
on a broad range of areas that need to be developed as a
whole.
Positive and Negative Impacts of Rostow s Model