Model of economic growth(vol 2)

MODEL of ECONOMIC GROWTH

The Harrod-Domar Economic Growth Model (With Assumptions)

Introduction to the Harrod-Domar Economic Growth Model:

Ever since the end of Second World War, interest in the problems of economic growth has led economists to formulate growth models of different types.

These models deal with and lay emphasis on the various aspects of growth of the developed economies. They constitute in a way alternative stylized pictures of an expanding economy.

feature common to them all is that they are based on the Keynesian saving-investment analysis. The first and the simplest model of growth—the Harrod-Domar Model—is the direct outcome of projection of the short-run Keynesian analysis into the long-run.

This model is based on the capital factor as the crucial factor of economic growth. It concentrates on the possibility of steady growth through adjustment of supply of demand for capital. Then there is Mrs. Joan Robinson’s model which considers technical progress also, along with capital formation, as a source of economic growth. The third type of growth model is that built on neo­classical lines.

It assumes substitution between capital and labour and a neutral technical progress in the sense that technical progress is neither saving nor absorbing of labour or capital. Both the factors are used in the same proportion even when neutral technical takes place. We deal with the prominent growth models here.

Although Harrod and Domar models differ in details, they are similar in substance. One may call Harrod’s model as the English version of Domar’s model. Both these models stress the essential conditions of achieving and maintaining steady growth. Harrod and Domar assign a crucial role to capital accumulation in the process of growth. In fact, they emphasise the dual role of capital accumulation.

On the one hand, new investment generates income (through multiplier effect); on the other hand, it increases productive capacity (through productivity effect) of the economy by expanding its capital stock. It is pertinent to note here that classical economists emphasised the productivity aspect of the investment and took for granted the income aspect. Keynes had given due attention to the problem of income generation but neglected the problem of productive capacity creation. Harrod and Domar took special care to deal with both the problems generated by investment in their models.

General Assumptions:

The main assumptions of the Harrod-Domar models are as follows:

(i) A full-employment level of income already exists.

(ii) There is no government interference in the functioning of the economy.

(iii) The model is based on the assumption of “closed economy.” In other words, government restrictions on trade and the complications caused by international trade are ruled out.

(iv) There are no lags in adjustment of variables i.e., the economic variables such as savings, investment, income, expenditure adjust themselves completely within the same period of time.

(v) The average propensity to save (APS) and marginal propensity to save (MPS) are equal to each other. APS = MPS or written in symbols,

S/Y= ∆S/∆Y

(vi) Both propensity to save and “capital coefficient” (i.e., capital-output ratio) are given constant. This amounts to assuming that the law of constant returns operates in the economy because of fixity of the capita-output ratio.

(vii) Income, investment, savings are all defined in the net sense, i.e., they are considered over and above the depreciation. Thus, depreciation rates are not included in these variables.

(viii) Saving and investment are equal to ex-ante as well as in ex-post sense i.e., there is accounting as well as functional equality between saving and investment.

These assumptions were meant to simplify the task of growth analysis; these could be relaxed later.

Harrod’s growth model raised three issues:

(i) How can steady growth be achieved for an economy with a fixed (capital- output ratio) (capital-coefficient) and a fixed saving-income ratio?

(ii) How can the steady growth rate be maintained? Or what are the conditions for maintaining steady uninterrupted growth?

(iii) How do the natural factors put a ceiling on the growth rate of the economy?

In order to discuss these issues, Harrod had adopted three different concepts of growth rates: (i) the actual growth rate, G, (ii) the warranted growth rate, Gw (iii) the natural growth rate, Gn.

The Actual Growth Rate is the growth rate determined by the actual rate of savings and investment in the country.  

Solow’s Model of Growth

Prof. Robert M. Solow made his model an alternative to Harrod-Domar model of growth.

It ensures steady growth in the long run period without any pitfalls. Prof. Solow assumed that Harrod-Domar’s model was based on some unrealistic assumptions like fixed factor proportions, constant capital output ratio etc.

Solow has dropped these assumptions while formulating its model of long-run growth. Prof. Solow shows that by the introduction of the factors influencing economic growth, Harrod-Domar’s Model can be rationalised and instability can be reduced to some extent.

He has shown that if technical coefficients of production are assumed to be variable, the capital labour ratio may adjust itself to equilibrium ratio in course of time.

In Harrod-Domar’s model of steady growth, the economic system attains a knife-edge balance of equilibrium in growth in the long-run period.

This balance is established as a result of pulls and counter pulls exerted by natural growth rate (Gn) (which depends on the increase in labour force in the absence of technical changes) and warranted growth rate (Gw) (which depends on the saving and investment habits of household and firms).

However, the key parameter of Solow’s model is the substitutability between capital and labour. Prof. Solow demonstrates in his model that, “this fundamental opposition of warranted and natural rates turns out in the end to flow from the crucial assumption that production takes place under conditions of fixed proportions.”

The knife edge balance established under Harrodian steady growth path can be destroyed by a slight change in key parameters.

Prof. Solow retains the assumptions of constant rate of reproduction and constant saving ratio etc. and shows that substitutability between capital and labour can bring equality between warranted growth rate (Gw) and natural growth rate (Gn) and economy moves on the equilibrium path of growth.

In other words, according to Prof. Solow, the delicate balance between Gw and Gn depends upon the crucial assumption of fixed proportions in production. The knife edge equilibrium between Gw and Gn will disappear if this assumption is removed. Solow has provided solution to twin problems of disequilibrium between Gw and Gn and the instability of capitalist system.

In short, Prof. Solow has tried to build a model of economic growth by removing the basic assumptions of fixed proportions of the Harrod-Domar model. By removing this assumption, according to Prof. Solow, Harrodian path of steady growth can be freed from instability. In this way, this model admits the possibility of factor substitution.

Assumptions:

Solow’s model of long run growth is based on the following assumptions:

1. The production takes place according to the linear homogeneous production function of first degree of the form

Y = F (K, L)

Y= Output

K = Capital Stock

L = Supply of labour force

The above function is neo-classic in nature. There is constant returns to scale based on capital and labour substitutability and diminishing marginal productivities. The constant returns to scale means if all inputs are changed proportionately, the output will also change proportionately. The production function can be given as aY = F (aK, al)

2. The relationship between the behaviour of savings and investment in relation to changes in output. It implies that saving is the constant fraction of the level of output. In this way, Solow adopts the Harrodian assumption that investment is in direct and rigid proportion to income.

symbolic terms, it can be expressed as follows:

I = dk/ dt = sY

Where

S—Propensity to save.

K—Capital Stock, so that investment I is equal

3. The growth rate of labour force is exogenously determined. It grows at an exponential rate given by

L = L0 ent

Where L—’Total available supply of labour.

n—Constant relative rate at which labour force grows.

4. There is full employment in the economy.

5. The two factors of production are capital and labour and they are paid according to their physical productivities.

6. Labour and capital are substitutable for each other.

7. Investment is not of depreciation and replacement charges.

8. Technical progress does not influence the productivity and efficiency of labour.

. There is flexible system of price-wage interest.

10. Available capital stock is fully utilized.

Following these above assumptions, Prof. Solow tries to show that with variable technical co-efficient, capital labour ratio will tend to adjust itself through time towards the direction of equilibrium ratio. If the initial ratio of capital labour ratio is more, capital and output will grow more slowly than labour force and vice-versa.

To achieve sustained growth, it is necessary that the investment should increase at such a rate that capital and labour grow proportionately i.e. capital labour ratio is maintained.

Solow’s model of long-run growth can be explained in two ways:

A. Non-Mathematical Explanation.

B. Mathematical Explanation.

A. Non-Mathematical Explanation:

According to Prof. Solow, for attaining long run growth, let us assume that capital and labour both increase but capital increases at a faster rate than labour so that the capital labour ratio is high. As the capital labour ratio increases, the output per worker declines and as a result national income falls.

The savings of the community decline and in turn investment and capital also decrease. The process of decline continues till the growth of capital becomes equal to the growth rate of labour. Consequently, capital labour ratio and capital output ratio remain constant and this ratio is popularly known as “Equilibrium Ratio”.

Prof. Solow has assumed technical coefficients of production to be variable, so that the capital labour ratio may adjust itself to equilibrium ratio. If the capital labour ratio is larger than equilibrium ratio, than that of the growth of capital and output capital would be lesser than labour force. At some time, the two ratios would be equal to each other.

In other words, this is the steady growth, according to Prof. Solow as there is the steady growth there is a tendency to the equilibrium path. It must be noted here that the capital-labour ratio may be either higher or lower.

Like other economies, Prof. Solow also considers that the most important feature of an underdeveloped economy is dual economy. This economy consists of two sectors-capital sector or industrial sector and labour sector or agricultural sector. In industrial sector, the rate of accumulation of capital is more than rate of absorption of labour.

With the help of variable technical coefficients many employment opportunities can be created. In agricultural sector, real wages and productivity per worker is low. To achieve sustained growth, the capital labour ratio must be high and underdeveloped economies must follow Prof. Solow to attain the steady growth.

This model also exhibits the possibility of multiple equilibrium positions. The position of unstable equilibrium will arise when the rate of growth is not equal to the capital labour ratio. There are other two stable equilibrium points with high capital labour ratio and the other with low capital labour ratio.

If the growth process starts with high capital labour ratio, then the development variables will move in forward direction with faster speed and the entire system will grow with high rate of growth. On the other hand, if the growth process starts with low capital labour ratio then the development variables will move in forward direction with lesser speed.

To conclude the discussion, it is said that high capital labour ratio or capital intension is very beneficial for the development and growth of capitalist sector and on the contrary, low capital-labour ratio or labour-intensive technique is beneficial for the growth of labour sector.

B. Mathematical Explanation:

This model assumes the production of a single composite commodity in the economy. Its rate of production is Y (t) which represents the real income of the community. A part of the output is consumed and the rest is saved and invested somewhere.

The proportion of output saved is denoted by s. Therefore, the rate of saving would be sY (t). The capital stock of the community is denoted by K it). The rate of increase in capital stock is given by dk/dt and it gives net investment.

Since investment is equal to saving so we have following identity:

K = sY … (1)

Since output is produced by capital and labour, so the production function is given by

Y = F (K, L) … (2)

Putting the value of Y from (2) in (1) we get

S = s F (K, L) … (3)

Where

L is total employment

F is functional relationship

Equation (3) represents the supply side of the system. Now we are to include demand side too. As a result of exogenous population growth, the labour force is assumed to grow at a constant rate relative to n. Thus,

L (t) = L0ent … (4)

Where

L—Available supply of labour

Putting the value of L in equation (3) we get

K = sF (K, L0ent) …(5)

The right hand of the equation (4) shows the rate of growth of labour force from period o to t or it can be regarded as supply curve for labour.

“It says that the exponentially growing labour force is offered for employment completely in elastically. The labour supply curve is a vertical line, which shifts to the right in time as the labour force grows. Then the real wage rate adjusts so that all available labour is employed and the marginal productivity equation determines the wage rate which will actually rule.”

If the time path of capital stock and of labour force is known, the corresponding time path of real output can be computed from the production function. Thus, the time path of real wage rate is calculated by marginal productivity equation.

The process of growth has been explained by Prof. Solow as, “At any moment of time the available labour supply is given by (4) and available stock of capital is also a datum. Since the real return to factors will adjust to bring about full employment of labour and capital we can use the production function (2) to find the current rate of output. Then the propensity to save tells us how much net output will be saved and invested. Hence, we know the net accumulation of capital during the current period. Added to the already accumulated stock this gives us the capital available for the next period and the whole process can be repeated.”

Possible Growth Patterns:

To find out whether there is always a capital accumulation path consistent with any rate of growth of labour force, we should know the accurate shape of production function otherwise we cannot find the exact solution.

Joan Robinson’s Model of Growth

Joan Robinson has given her model of growth in her classic book.

‘The Accumulation of Capital’ in 1956. Joan Robinson’s model clearly takes the problem of population growth in a developing economy and analyses the influence of population on the role of capital accumulation and growth of output.

The two fundamental propositions of the model are as under:

1. The capital formation depends on the manner of distribution of income.

2. The rate at which labour is utilized depends upon the supply of capital and that of labour.

Assumptions:

1. Labour and capital are the only productive factors. It implies that the national output is the result of combined efforts of these two factors of production.

2. The economy is assumed to be closed i.e., there is no foreign trade.

3. Total wage bill is the product of real wage rate and number of workers.

4. Total income is divided between capital and labour as these are the two factors of production.

5. The production is not affected by the technological changes i.e. there is no progress in technology.

6. Total profit is the product of profit rate and amount of capital invested.

7. There is constancy in price level.

8. Wage earners spend all of their wage income on consumption, while profit takers save and invest all of their profit income.

. Capital and labour are combined in a fixed proportion for a given output.

10. The national income is the sum of wage bill and total profits.

11. There is no scarcity of labour and entrepreneurs can employ as much labour as they wish.

12. Entrepreneurs consume nothing but save and invest their entire income for capital formation. If they have no profits, there is no accumulation and if they do not accumulate, they have no profits.

Open Model:

In an open economy, the conditions for the steady growth and conditions for rising rate of capital accumulation will be discussed. According to Mrs. Joan Robinson, national income is the sum of the total wage bill and total profit. Total wage bill is the real wage multiplied by the number of workers and total profits are equal to profit rate multiplied by the amount of capital.

This relationship can be expressed as under:

PY = WN + πPK

Where P — Average Price level.

Y— Net national income.

W — Net money wage rate.

N— Amount of labour employed.

K— Amount of capital invested.

π — Rate of profit.

convert the expression into real terms, divide both sides of equation by p (average price level), we get

Where ρ Y/N i. e Labour/ Productivity, W/P real The 

State of Disequilibrium:

The economy will possess any equilibrium mechanism if and when it diverges from Golden age equilibrium for some reason.

There are two possibilities of divergence:

(i) ∆N/N˃ ∆K/K

(ii) ∆K/K ˃ ∆K/ A

1. The first possibility (i.e., ∆N/N ˃ ∆K/ K) shows that the growth rate of population is greater than growth rate of capital. This type of situation occurs in underdeveloped countries. Mrs. Robinson is of the view that it is the ‘profit wage relation’ which pushes the economy back on the path of Golden age. The excess of labour supply would depress the money wage rate and if the prices remain constant, the real wages would fall.

This fall in real wages would increase the level of profit, which in turn would stimulate the growth of capital. The increase in the growth rate is unable to fulfil the labour supply of population. When the parity between the two growth rates are restored, then the economy would be on Golden age.

On the other hand, if real wages do not fall because of subsistence wage floor or if the general price level does not fall in same proportion as money wage rate, it would be difficult to restore the position of Golden age and it will lead to under employment.

2. The second possibility comes out as the economy is in the disequilibrium and can be expressed as ∆N/N ˂ ∆K/K Under the situation, the growth rate of population is less as compared to growth rate of capital. This type of situation occurs in developed countries. The possibility of advanced countries returning to the path of Golden age equilibrium is greater than that of underdeveloped economies.

This is due to the fact that developed countries can move to higher production curve through the technological improvement. The higher production curve will lead to higher capital labour ratio. Thus, the equality between growth rate of capital and growth rate of labour is a pre-requisite for achieving the Golden age. equation illustrates that the rate of growth of capital is capable of increasing if the net returns to capital rise in greater proportion than the capital-labour ratio and vice-versa. In other words, lower rate of profit always affects the supply of capital adversely which in turn widens the gap between supply of capital and labour. The main feature of the model is that the rate of growth of capital is dependent on profit rate.

Closed Model:

In a closed economy, the concepts of Golden age and Platinum age are to be discussed. In simple words, Golden age is a situation of smooth steady growth with full employment arising out of the equality of the ‘Desired’ and ‘Possible’ rates of accumulation and has been designated by Mrs. Joan Robinson as the Golden age equilibrium.

However, if an increase in labour supply is not accompanied by proportionate increase in the capital supply, then it will cause unemployment in the economy. To achieve full employment of labour the growth rate of population must be equal to growth rate of capital i.e.

∆N/N = ∆K/K

When the rate of growth of labour and capital are equal to each other, then there is full utilisation of capital in the economy. Such a switch on is called Golden age. The existence of Golden age is the indicator of full employment level.

The concept of Golden age implies that there must be equality in actual, warranted and natural growth rates.

In short, in Mrs. Robins

on Joan’s words, when technical progress is neutral and proceeding steady, without any change in the time pattern of production, the competitive mechanism works freely, population grows (if at all) at a steady rate and accumulation goes on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages rises with output per head.

Then there are no internal contradictions in the system, we may describe these conditions as a Golden age (thus indicating that it represents a mythical state of affairs not likely to obtain in any actual economy). This is explained with the In the figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

Tangent NT touches the curve OP at A and intersects Y-axis at W. At point A capital labour ratio is OC, the productivity of labour is OD and out of which OW is the wage rate. The surplus DW is rate of return to capital.

The point A shows the position of equilibrium because the slope of tangent NT and the slope of production curve OP is the same. It can also be said that at A, the growth rate of capital ∆K/K is equal to growth rate of labour ∆N/N. of a diagram 1. ratethe figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

Tangent NT touches the curve OP at A and intersects Y-axis at W. At point A capital labour ratio is OC, the productivity of labour is OD and out of which OW is the wage rate. The surplus DW is rate of return to capital.

The point A shows the position of equilibrium because the slope of tangent NT and the slope of production curve OP is the same. It can also be said that at A, the growth rate of capital ∆K/K is equal to growth rate of labour ∆N/N.

θ = K/N i.e., Capital Labour Ratio

The above equation indicates that the profit rate is a function of labour productivity (p) and real wage rate (W/P) and capital labour ratio (8). In other words, the profit rate is shown as capable of varying directly with the rate of net return to capital and inversely with the coefficient of capital intensity. The necessary condition for maximization is that the first derivative must be zero.

Keynesian income expenditure analysis shows that the net national real income (Y) is the sum of real consumption expenditure (C) and real net investment which can be expressed as;

Y = C + I

Now we know that labour spends its entire income and saves nothing. The profit earning class makes saving in the form of profit. According to Mrs. Robinson, savings must be equal to total profits. Thus, savings in a given period are equal to capital investment multiplied by rate of profit.

Th above equation illustrates that the rate of growth of capital is capable of increasing if the net returns to capital rise in greater proportion than the capital-labour ratio and vice-versa. In other words, lower rate of profit always affects the supply of capital adversely which in turn widens the gap between supply of capital and labour. The main feature of the model is that the rate of growth of capital is dependent on profit rate.

Closed Model:

In a closed economy, the concepts of Golden age and Platinum age are to be discussed. In simple words, Golden age is a situation of smooth steady growth with full employment arising out of the equality of the ‘Desired’ and ‘Possible’ rates of accumulation and has been designated by Mrs. Joan Robinson as the Golden age equilibrium.

However, if an increase in labour supply is not accompanied by proportionate increase in the capital supply, then it will cause unemployment in the economy. To achieve full employment of labour the growth rate of population must be equal to growth rate of capital i.e.

∆N/N = ∆K/K

When the rate of growth of labour and capital are equal to each other, then there is full utilisation of capital in the economy. Such a switch on is called Golden age. The existence of Golden age is the indicator of full employment level.

The concept of Golden age implies that there must be equality in actual, warranted and natural growth rates.

In short, in Mrs. Robinson Joan’s words, when technical progress is neutral and proceeding steady, without any change in the time pattern of production, the competitive mechanism works freely, population grows (if at all) at a steady rate and accumulation goes on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages rises with output per head.

Then there are no internal contradictions in the system, we may describe these conditions as a Golden age (thus indicating that it represents a mythical state of affairs not likely to obtain in any actual economy). This is explained with the help of a diagram 1.

the figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

Tangent NT touches the curve OP at A and intersects Y-axis at W. At point A capital labour ratio is OC, the productivity of labour is OD and out of which OW is the wage rate. The surplus DW is rate of return to capital.

The point A shows the position of equilibrium because the slope of tangent NT and the slope of production curve OP is the same. It can also be said that at A, the growth rate of capital ∆K/K is equal to growth rate of labour ∆N/N.

State of Disequilibrium:

The economy will possess any equilibrium mechanism if and when it diverges from Golden age equilibrium for some reason.

There are two possibilities of divergence:

(i) ∆N/N˃ ∆K/K

(ii) ∆K/K ˃ ∆K/ A

1. The first possibility (i.e., ∆N/N ˃ ∆K/ K) shows that the growth rate of population is greater than growth rate of capital. This type of situation occurs in underdeveloped countries. Mrs. Robinson is of the view that it is the ‘profit wage relation’ which pushes the economy back on the path of Golden age. The excess of labour supply would depress the money wage rate and if the prices remain constant, the real wages would fall.

This fall in real wages would increase the level of profit, which in turn would stimulate the growth of capital. The increase in the growth rate is unable to fulfil the labour supply of population. When the parity between the two growth rates are restored, then the economy would be on Golden age.

On the other hand, if real wages do not fall because of subsistence wage floor or if the general price level does not fall in same proportion as money wage rate, it would be difficult to restore the position of Golden age and it will lead to under employment.

2. The second possibility comes out as the economy is in the disequilibrium and can be expressed as ∆N/N ˂ ∆K/K Under the situation, the growth rate of population is less as compared to growth rate of capital. This type of situation occurs in developed countries. The possibility of advanced countries returning to the path of Golden age equilibrium is greater than that of underdeveloped economies.

This is due to the fact that developed countries can move to higher production curve through the technological improvement. The higher production curve will lead to higher capital labour ratio. Thus, the equality between growth rate of capital and growth rate of labour is a pre-requisite for achieving the Golden age.

Desired Rate of Accumulation:

Mrs. Robinson established a relation between the desired rate of accumulation and possible rate of accumulation.

The desired rate of accumulation which would make the firms feel satisfied with economic conjecture in which they find themselves. It is necessary to know the relation between “the rate of profit caused by the rate of accumulation and the rate of accumulation which the rate of profit will induce

Applicability to Underdeveloped Countries:

This model deals with the problem of population and its effect on rate of capital accumulation in a developing economy. There is Golden age which any country can witness through planned economic development. The main problem of an underdeveloped country is that the rate of population growth is faster than capital growth i.e. ∆N/ N ˃ ∆K/K.

This results in the under-employment. In underdeveloped country, we need a growth theory which is based on only practical ideas and techniques which could be operative in their present socio-economic environment. The process of economic growth in underdeveloped country without changing the price level would simply be a blind man’s buff. Therefore, some rise in price level is necessary.

The model of Joan Robinson is dictum against ‘Capitalist rules of the game’.

Prof. K.K. Kurihara who opines that “Joan Robinson’s discussion of capital growth has subtle effect of discrediting the whole idea of leaving so important a problem as economic growth to capitalist rules of the game for her model of Laissez faire growth demonstrates how precarious and insecure it is to entrust to private profit makers the paramount task of achieving the stable growth of economy consistent with the needs of a growing population and possibility of advancing technology.”

This model brings out cogently that the main problem to achieve steady growth depends upon population growth and capital accumulation.

The ‘potential growth ratio’ is crucial to Mrs. J. Robinson theory of economic growth. The Golden age depends upon growth ratio. The planning process becomes easier if the potential growth ratio of the economy is calculated for such period on the basis of the growth rate of labour force and of output per head.

The chief hurdle in the path of capital accumulation is population growth. When the rate of growth of population is above the rate of capital formation it leads to progressive unemployment. Thus, the plan can be made more realistic and executed more efficiently to achieve the desired goals.

Furthermore, it suggests to take initiative in controlling not the private investment but also public investment in under developed countries. In this way, Mrs. Joan Robinson hints at the adoption of the Keynesian technique of the mixed public private economy to gear the autonomous investment with the help of fiscal and monetary policies

Critical Evaluation:

Mrs. Joan Robinson presents an interesting classification of growth process. This model seems to provide more realistic analysis of the problem of economic development in under developed countries.

In Harrod-Domar model, the capital accumulation depends upon saving ratio and capital productivity but in Robinson Model, it depends upon the profit wage relation and labour productivity bringing her theory closer to a real market economy.

The idea of Golden age lays stress on the parity between the growth rate of capital and growth rate of population. This difference between two growth rates is necessary for underdeveloped countries striving to achieve development with stability. Despite of many merits, the model is not free from flaws.

Some of these weak points are summarised below:

1. Neglects Institutional Transformation,

2. Constant Price Level,

3. Closed Economy,

4. Unrealistic Assumptions,

5. Neutrality to Policy Implications,

6. Role of Human Capital ignored,

7. Low Rate of Capital Accumulation in relation to Potential Growth,

8. No Role of State, and

9. No Technical Progress.

1. Neglects Institutional Transformation:

This model ignores institutional transformations for promoting savings.

The capital accumulation among other things implies:

(a) An increase in the volume of savings

(b) Finance and credit mechanism

(c) Act of investment

(d) Pattern of investment involving the use of capital

(e) Changing technology. But these factors find no place in the model.

The development of an economy depends upon social, cultural and institutional changes to a greater extent.

2. Constant Price Level:

This model is based on the unrealistic assumption of constant price level. The investment has to be increased continuously which tends to raise the demand for factors but their supply cannot be increased to meet the demand. This results in increase in prices which is a contradiction.

3. Closed Economy:

The model is based on the closed economy but this is unreal because underdeveloped countries are open rather than closed economies in which foreign trade and aid play creditable role in increasing the growth rate.

4. Unrealistic Assumptions:

Another weakness of the model is that it is based on certain assumptions which do not hold good in the present era. The technical neutrality does not fit in the dynamic process of growth. Growth model becomes irrelevant if factors like these are taken to be neutral.

The assumption of closed economy Laissez faire, free market system, price stability and neglect of institutional forces are all unrealistic, and this makes the economy static. Static economy and economic development cannot go side by side.

5. Neutrality to Policy Implications:

It does not suggest any fiscal or monetary policy for economic development. Prof. K.K. Kurihara is of the opinion that Mrs. Robinson’s model is not capable to introduce fiscal and monetary policy parameters. Prof. V.B. Singh has observed.

“That the critical deficiency of this model consists in its neutrality to the important policy implications in economic development.” The crux of the discussion is that this model fails to consider fiscal or monetary parameters without which theory of development remains more or less incomplete.

6. Role of Human Capital Ignored:

This model lays more emphasis on material capital but ignores the role of human capital. The essential ingredients of capital are education and technical training. Marx emphasised the role of labour productivity in the accumulation of capital. Mc Cullach included, The dexterity skill the accumulation of capital. Further, he says, the dexterity skill and intelligence of labour in his concept of capital.

The contemporary development writes subscribe to this approach by including, “investment in human capital” in their development theories. Human capital means investment in education, health, sanitation and nutrition etc. This model gives an explanation for economic development because it emphasizes the accumulation of physical capital while neglects the role of human capital.

7. Low Rate of Capital Accumulation in Relation to Potential Growth:

Generally underdeveloped countries are backward due to shortage of capital accumulation than potential growth ratio and have surplus labour force. In this regard Prof. K. Kurihara has rightly mentioned, “Joan Robinson’s discussion of capital growth has the subtle effect of discrediting the whole idea of leaving so important a problem as economic growth to the capitalist rule of the game, for her model of Laissez-faire growth demonstrates how precarious and insecure it is to entrust to provide profit makes the paramount task of achieving the stable growth of an economy consistent with the needs of a growing population and the possibility of advancing technology.”

8. No Role of State:

In Mrs. Joan Robinson’s model, the role of state has been left out of picture. In the present world, it is precarious to rely solely on the private entrepreneurs for attaining the stable growth in them with the requirements of a growing population and rapidly changing technology.

9. No Technical Progress:

According to the model, there is no technical progress. But in a dynamic setting where technical progress is inherent, technical co-efficient of production can no longer remain fixed.

KALDOR MODEL OF ECONOMIC GROWTH

del  f Economic Growth 

his essay titled A Model of Economic Growth, originally published in Economic Journal in 1957, postulates a growth model, which follows the Harrodian dynamic approach and the Keynesian techniques of analysis. In his growth model, Kaldor attempts "to provide a framework for relating the genesis of technical progress to capital accumulation", whereas the other neoclassical models treat the causation of technical progress as completely exogenous

The purpose of a theory of economic growth is to show the nature of non-economic variables which ultimately determine the rate at which the general level of production of economy is growing, and thereby contribute to an understanding of the question of why some societies grow so much faster than other

AssumptionsEdit

The basic properties of Kaldor's growth model are as follows:

1. Short period supply of aggregate goods and services in a growing economy is inelastic and not affected by any increase in effective monetary demand. As it is based on the Keynesian assumption of "full employment".
   
2. The technical progress depends on the rate of capital accumulation. Kaldor postulates the "technical progress function", which shows a relationship between the growth of capital and productivity, incorporating the influence of both the factors. Where the capital-output ratio will depend upon the relationship of the growth of capital and the growth of productivity.
3. Wages and profits constitute the income, where wages comprise salaries and earnings of manual labour, and profits comprise incomes of entrepreneurs as well as property owners. And total savings consist of savings out of wages and savings out of profit.
4. General price level is constant.

facts of economic growth

Kaldor summarized the statistical properties of long-term economic growth in an influential 1957 paper.

pointed out the 6 following 'remarkable historical constancies revealed by recent empirical investigations

1. The shares of national income received by labor and capital are roughly constant over long periods of time
2. The rate of growth of the capital stock per worker is roughly constant over long periods of time
3. The rate of growth of output per worker is roughly constant over long periods of time
4. The capital/output ratio is roughly constant over long periods of time
5. The rate of return on Investment is roughly constant over long periods of time
6. There are appreciable variations (2 to 5 percent) in the rate of growth of labor productivity and of total output among countries.

Kaldor did not claim that any of these quantities would be constant at all times; on the contrary, growth rates and income shares fluctuate strongly over the business cycle. Instead, his claim was that these quantities tend to be constant when averaging the data over long periods of time. His broad generalizations, which were initially derived from U.S. and U.K. data, but were later found to be true for many other countries as well, came to be known as 'stylized facts'.

These may be summarized and related as follows:

1. Output per worker grows at a roughly constant rate that does not diminish over time.
2. Capital per worker grows over time.
3. The capital/output ratio is roughly constant. (1+2)
4. The rate of return to capital is constant.
5. The share of capital and labor in net income are nearly constant.
6. Real wage grows over time. (2+4+5)

TECHNICAL PROGRESS

Technical progress can be classified into two parts:

• Embodied Technical Progress: improved technology which is exploited by investing in new equipment. New technical changes made are embodied in the equipment.
• Disembodied Technical Progress: improved technology which allows increase in the output produced from given inputs without investing in new equipment.

In the real world, many innovations do not require replacing the entire or some part of the equipment. It can be improved for better use depending upon the change required. Hence technological progress, embodied or disembodied, is matter of degree