BALANCED GROWTH THEORY

This theory was presented by Ragnar Nurkse.

DEF: Balanced growth implies growth in every kind of capital stock constant rates.
Or
UN Publications:
Balanced growth refers to full employment, a high level of investment, overall growth in
productive capacity equilibrium.
Or
Planning with balanced growth means that all sectors of the economy will expand in same
proportion, so that consumption, investment and income will grow at the same rate.
Dependence:
Theory depends upon following three factors:
 Investment in lacking sector and is must be leading sector.
 Large investments should be done in all sectors of the economy simultaneously.
 Balanced development of all the sectors such as agriculture, industry, education, trade
etc.
Flowchart:
The whole theme of balanced growth theory can be illustrated with the help of following
flowchart.

large investment in many sectors simultaneously

complimentary demand between sectors

market size expands

economic growth and development

Explanation: By having large investment in many sectors simultaneously the complimentary

demand between sectors will increase because the industries are interlinked and output of one
industry is the input of the other. So if simultaneous investment is done then all the sectors
will grow resulting in expansion of market size. And it is understood that when large
investments are made and markets expand economic growth and development of an economy
takes place.
DETERMINANTS OF THE MARKET SIZE:
1. Money supply: According to this theory classical approach should be followed
rather than Keynesians approach in developing countries. There is always less
 effective demand so the best suited criteria for monetary policy should be
followed. When sectors of economy grow it brings in more money. This increased
money supply leads to new investments in markets and growth of the size of
market.
2. Population size: Nurkse argued against the notion that a large population implies a
large market. Though underdeveloped countries have a large population, their
levels of productivity are low. This results in low levels of per capita real income.
Thus, consumption expenditure is low, and savings are either very low or
completely absent. On the other hand, developed countries have smaller
populations than underdeveloped countries but by virtue of high levels of
productivity, their per capita real incomes are higher and thus they create a large
market for goods and services. So, this can be concluded that market size has an
inverse relation with population.
3. Trade barriers: Trade barriers exercised via tariffs, quotas and subsidies are
considered as a hindrance to market expansion and growth of any economy.
However, now United Nation has suggested market expansion by forming custom
unions with neighboring countries and adopting system of preferential taxation.
4. Productivity: Large scale production and higher productivity increases the flow of
goods and services in an economy. As a response to this flow, consumption levels
also rise causing an increase in market size. The effect of increased productivity
can be illustrated as:
increase in productivity

increase in inflow of goods and services

increase in consumption

increased size of market

inducement to economic growth and development

Balance in any economy can be made in three ways:

1. Balance between agriculture and industry.
2. Balance between human and physical capital.
3. Balance between domestic and foreign trade.