Presentation On:

MODEL OF ECONOMIC DEVELOPMENT

 INTRODUCTION
Liberty from poverty is the essence of development. A better society
with modern amenities where individuals enjoy quantitatively
higher life and a dignified nation committed to sustained and
advanced standard of living for longer period for a longer segments
of the people are the concerned of economic development.
It is the process of increasing the real per capita income of a country
over a long period of time accompanied by changes in its structure
and institutions. The process involves not only changes in the
economic structure, but is interlinked with the entire social, political
and cultural fabric of society. The development does not mean mere
increase in the per capita income or mere industrialization but “a
process involving a number of qualitative changes, nothing less than
the upward movement of the entire social system”.
 DEFINITIONS
Adam Smith- "Development as an inquiry into the nature and causes of wealth of nation and their rise".

Karl Marx- "Development in terms of fair share of national income for all including workers".

M.P. Todaro - "Development as in terms of three values i.e. Life Sustenance, Freedom of Choice and Self-
Esteem”.

Prof. Winston- "Economic Development shows the excess of consumption and production of a country as
compared with increase in population. This increase in population is due to better combination and increase
in the productivity of the factors of production".

Prof. Williamson- "Economic Development is a process whereby the people of a country utilize the available
resources in such a way that the per capita income of the country increases".

Prof. Higgins- "Economic Development is the increase in per capita and national income (NI) of a country".

Prof. Arthur Lewis- "Economic Development represents the per capita increase in the production of a
country".

Prof. Meir and Baldwin- "Economic Development is a process whereby the real NI of a country increases
over a long period of time. If the increase in the real NI is more than the population increase then the per
capita real income of the country will also increase".
INDICATORS OF ECONOMIC DEVELOPMENT

Rise in Factor
Volume Per Capita Income
Productivity

Physical Quality of Life

Rise in Living Standard
Index

Poverty Alleviation and

Human Development Index
Inequality Reduction
 MODELS OF ECONOMIC
DEVELOPMENT
✓ ROSTOW’S MODEL : THE 5 STAGES OF ECONOMIC
DEVELOPMENT
The Rostovian take-off model (also called "Rostow's Stages of Growth")
is one of the major historical models of economic growth. It was
developed by W. W. Rostow. The model postulates that economic
modernization occurs in five basic stages, of varying length.

1) The traditional society,

2) The preconditions for take-off,
3) The take-off,
4) The drive to maturity, and
5) The stage of high mass-consumption.
SAVINGS AND INVESTMENTS IN INDUSTRIES
5
STAGE OF HIGH MASS
4
DRIVE OF MATURITY

3
TAKE-OFF

2
PRE-TAKE OFF

1
TRADITIONAL

ROSTOW’S MODEL
TRADITIONAL SOCIETIES
These are societies which have pre-scientific understanding of gadgets and
believe that Gods or spirits facilitate the procurement of goods, rather than
man and his own ingenuity. The norms of economic growth are completely
absent from these societies.
PRECONDITIONS FOR TAKE-OFF
The preconditions to take-off are, to Rostow, that the society begins
committing itself to education, that it enables a degree of capital mobilization
of banks and currency, that an entrepreneurial class form.
TAKE-OFF
Take-off then occurs when sector led growth becomes common and society is
driven more by economic processes than traditions.
DRIVE TO MATURITY
It refers to the need for the economy itself to diversify. The sectors of the
economy which lead initially begins to level off, while other sectors begin to
take off.
STAGE OF HIGH MASS COMMUNICATION
The age of high mass consumption refers to the period of contemporary
comfort afforded many Western nations, wherein consumers choose
concentrate on durable goods and hardly remember the subsistene concerns
of previous stages.
 ✓ THE CLASSICAL THEORY OF GROWTH
This model ignored the role which technical progress could play. It is the technical progress
which can minimize the role of diminishing returns.
DIVISION OF LABOUR
According to Adam Smith, division of labour is the starting point of economic growth.
It id the division of labour that results in the greatest improvement in the productive
powers of labour. Division of labour, however, depends on the size of the market.

CAPITAL ACCUMULATION
All classics regard capital accumulation as the key to economic progress. They lay
emphasis on large savings. Only capitalists and landlord are capable of saving. The
working class gets wages equal to the subsistence level.

PROFIT THE INCENTIVES TO INVESTMENT

According to the classics, profits induce investment. The larger the profits, the greater
the capital accumulation and investment.
AGENTS OF GROWTH

According to Adam Smith, farmers, producers and business men are the agents of
economic growth.
 ✓ THE LEWIS DUAL SECTOR MODEL

This theory explains the mechanism of changing structure of underdeveloped

economics from subsistence agriculture to more modern and more urbanized.
This model became the general theory of the development process for surplus
labor nation during 1960s and early 1970s.

Lewis model consists of two sectors in the economy. They are

Traditional Sector: This sector is overpopulated subsistence sector where
marginal productivity of labor is zero. Due to zero marginal productivity of
labor it is possible to withdraw labor from this sector without affecting the
level of output. This is why Lewis classified this sector as surplus labor sector

Modern sector: This sector is urban industrial sector. Productivity is high in this
sector. Labor is gradually transferred into this sector from traditional sector.
Movement of labor from traditional to modern sector brings the expansion in
both output and employment. The speed of this expansion depends on
Rate of industrial investment and capital accumulation which ultimately
depends on the level of profit. Lewis assumes that all profits are reinvested.
 ✓ NURKSE’S THEORY OF GROWTH
Joan Robinson was perhaps the first economist who used the term
‘disguised unemployment’. The concept of disguised unemployment
was introduced into the theory of under development by Rosenstein-
Roden and was elaborated by Ranger Nurkse.
Disguised unemployment means that given the techniques and
productive resources, the marginal productivity of labour in agriculture,
over a wide range in over-populated under-developed countries. It is
possible to withdraw some surplus labour from agriculture sector
without reducing total farm output. Such unemployment is found where
too many workers are engaged in agricultural operations because of the
lack of alternative or complimentary employment opportunities.
The disguised unemployment as a saving potential has two problems:
❑ How to feed the surplus population transferred to the various capital
projects
❑ How to provide the various tools to the new workers to work with.
 ✓ THE HARROD-DOMAR MODELS OF GROWTH

o This model describes the mechanism by which more investment

leads to more growth.
(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
➢ Harrod Model (Sir Roy Harrod of England)
Independent model Harrod Model is GC=s
The actual growth rate (G) is determined by saving-income ratio and capital output ratio. In
these equations:

G= ΔY/Y, C= ΔY/ ΔY = I/ ΔY, s= S/Y

The equation GC = s explains that the condition for achieving the steady sate growth is
that ex-post savings must be equal to ex- post investment, I=S
Here, G= Growth Rate
Y= National Income
ΔY= Change in National Income
K= Capital Stock
ΔK= Change in Capital stock
S= National Saving Investment
s= National Income-Saving Ratio

➢ Domar Model (Prof. Evesy Domar of the USA)

Independent Domar Equation :
G= ΔY/Y = α.σ
Where, G= Growth Rate
ΔY= Change in National Income
Y= National Income
α (alpha)= Marginal Propensity to Save
σ(sigma)=Productivity of Capital or Net Investment
 CONCLUSION
Economic development is a multidimensional process that involves
interactions among different goals of development and therefore would
require systematically designed policies and strategies. Development issues
are complex and multifaceted. There is no one single pathway for economic
development that all countries can pursue.

The critical knowledge in finding the source of growth has been closely
related to capital formation. However, as reviewed previously, the major
weakness of the early theories is that they focused on finding the
constraints in capital formation of one factor, such as physical capital or
human capital, that limit economic growth. Hence, their solution is simply
to increase investments in the factor identified.
Thankyou!