ECONOMICS II

Economics III

Date: 6-1-23
GDP and other indicators are very important. So, per capita income forms the base. It is a
necessary but not sufficient element to achieve economic growth. That is why so many new
indicators have emerged.
It is more about how vicious cycle of low- or middle-income countries can be solved. It is
vicious cycle to virtuous cycle of growth. Development economics is all about pushing these
developing economies from a vicious cycle to a virtuous cycle so that they do not fall into the
vicious cycle of poverty again.

What are the components of this vicious cycle?

 Starts from low average income.
 Low savings and investment
 Low capital formation
 Low productivity

Some countries easily move from low average income to high income. Vicious to virtuous
can easily be achieved by overutilisation of resources etc. But that does not serve the purpose
of sustainable development.
In view of economists, there are 4 wheels of growth and development:
- Labour
- Capital
- Natural resources
- Technology

Q = T f [L, K, N]

Labour supply or quantity of labour. This is necessary but not sufficient. Quality of labour is
sufficient. As we are moving from quantity to quality, we are moving from growth to
development. The most important thing related to human resource development is population.
Separating and segregating growth and development came about when population explosion
was taking place. For better human resource, better control on population is required.
For labour, 3 components:
- Skill
- Knowledge
- Dexterity

For example, in India, 1960s and 1970s was when population growth was taking place. We
were not getting actual results because population growth rate was very high. Population
grows exponentially but food production grows arithmetically. This is Malthusian theory of
population.

First thing is to control population because it will lead to better human resources.

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Immediately after when GDP or HDI came into existence, they started taking knowledge as
one dimension. Healthy labour is required. When productivity of labour will increase,
development will be there with growth.

There are many countries which have resources but do not develop. For example, Venezuela.
There are many countries which do not have resources but have development. For example,
Singapore, Japan.
Initially, Japan started with imitating things. They innovated form that imitation. They moved
out of that dependency and through the process of reverse engineering, they came up. Now,
they are facing problems like high debt and high borrowings.

 Capital formation
When new theories of development came into existence, economists focused on capital.
Accumulation of capital is very important, not just having a given stock of capital. For high
capital formation, high savings are required. All these developed countries have moved from
very low savings to high. Abstaining from consumption is very important for achieving a
high rate of capital formation. Low income countries have a problem i.e., majority of the
population is already at subsistence level and we cannot ask them to abstain from
consumption.

Date: 7-1-23
Capital formation means having more and more capital. For that, there is a need to abstain
from consumption. These are essential for capital formation.
1. Increased savings
2. Mobilisation
3. Channelisation- this channelisation will keep on changing.
Every time, government has to allocate funds for meeting specific goals. SDGs are there for
the world. These goals keep on changing. That is why channelising in one particular sector-
when goals are being achieved, these are self-enforcing.
For example, agriculture industries are requiring more. Later, MSMEs are requiring more.
After subsistence or basic needs, if you are having something, you can go for savings.
Undoubtedly, it is a challenging situation. The middle or upper middle class can be
encouraged to save.

 Technology
Technology brings improvement everywhere in all the components. Productivity, which is a
very important component for growth brings improvement in all three.

 Development
There are various ways of defining development. When social structures, popular attitudes
and national institutions have to change.

Every year, World Bank releases new classification of economics on the basis of GNI per
capita. The method they use is the Atlas Method.

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Four factors are taken into consideration:

1) Inflation
2) Exchange rate – PPP method is used.
3) Economic growth
4) Population
With the help of GDP deflator of every country and SDR deflator,
The method is such that GNI of a country is being divided by midyear population. Every
country calculates midyear population i.e., January – June. It gives a real picture of the
changes that are happening. This is done to see how many residents are there and how they
are contributing to income. If you go to world bank site, you will not always see an upward
movement. There can be a downward movement as well.

1) Low income countries - < $1085

2) Lower middle income countries - $1086 - $4255
3) Upper middle income countries - $4256 - $13205
4) Higher income countries - > $13205

Basic definitions of development

Multi-dimensional approach to economic development
Denis Goulet
He defines three core components:
1) Sustenance: Being able to fulfil basic needs like food, shelter, health and protection.
2) Self-esteem: The dignity a person should get like self-respect. If a country is able to
provide this, automatically, mental security is there. It is now being used by every
development economist. Earlier, it was never the case.
3) Freedom from servitude: You should have the choice to live the way you want
where you are not being trapped in a rigid society.

This is required irrespective of the status of the economy.

Date: 9-1-23
Dudley Seers
Three important economic factors
1. what is happening to unemployment
2. what is happening to poverty- The cut off is decided by the countries and when they
come out of these thresholds then they are making improvements and qualify as
developing. These cut offs come with specific indicators. What are the criterions to
qualify BPL? Eg., rs. 32 per day and below is BPL. But this method is faulty because
what if someone makes 33 rs that would mean that they are out of poverty however,
that is not true. But we use this method for simplicity. Economists criticize this
method and say that a number of things must be taken into consideration to determine
poverty. absolute poverty is coming down but inequality is increasing
3. what is happening to inequality

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If any particular country is not able to achieve or chronically deprived in these particular
factors. Countries should make these policies to address the same

Amartya Sen
 has an important role in defining development and economic growth.
 He got a Nobel Prize in Welfare Economics in 1998.
 Books: Development as freedoms.
 development is enhanced by i) democracy, ii) protection of human rights. Freedom
of speech, expression, assembly etc.
 Development is enhancement of freedoms that allow people to lead lives that they
have reasons to live. What you are doing and what you are getting out of the
commodities is important.
 What does his definition mean? The removal of major sources of unfreedom. He
definiens unfreedom- reducing/removing poverty, tyranny, inequality, poor economic
opportunities, systemic social deprivations, neglect of public facilities and intolerance.
 Five types of freedom- political, economic, social opportunities, security and
transparency.
 State has a major role in dealing with these unfreedoms: public health, social
safety net, enhancing productivity, social safety net, etc.
 Capabilities to function: what are functioning? He defines them as what people do
and can do with the commodities of given characteristics that they come to possess
and control. A functioning is a valued being/ doing. Being healthy and nourished.
Whether you are being able to utilise and value the commodities given to you.

Special focus on freedom for evaluative reasons and because of effectiveness reasons.
1. Evaluative reasons: The progress of an individuals which is leading to progress of
society and enhancement of economy as a whole. Whenever people have more
freedom on making choices. Using commodities which has satisfying powers.
2. Effective reasons: choices that a person can make. In the process of development
there are things which are affecting the development of an individual directly and
indirectly. Directly-nourishment, education, Indirectly- political environment,
economic environment.

What is freedom?
Freedom is a Process that encourages, fosters, enhances freedom of actions and decisions. It
fosters opportunities arising from personal and social circumstances. It’s a cyclical procedure.

Freedom is one part to Sen’s capability approach. Another important focus and part of the
capability approach is ‘wellbeing’.

What is Wellbeing?
Freedom is directly connected to wellbeing. According to Sen, well-being cannot be
effectively evaluated without considering five personal and social factors.

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1. Personal Heterogeneities
Any disability of a person, gender, age, illness are all factors which come under
personal heterogeneities. These are the factors which are creating the gap between
real incomes and actual advantages.
2. Environmental diversity
Extreme weather conditions will lead to someone having to use more resources to
deal with said weather conditions. These resources therefore may not be able to
enjoyed.
3. Social climate
Social climate includes increasing crime because of which one has to divert their
incomes towards protecting themselves. Sen includes Education also in social climate.
4. Differences in relational perspective
To maintain status within community you have to take away from funds from other
things. This is because of pressure in the community. Demonstration effect or herd
mentality plays a role wherein you want to follow what the higher section of society is
following.
5. Distribution within family
Feminist perspective, single income households.

Freedom not only makes our lives richer and more unfettered, but also allows us to be fuller
social persons, exercising our own volitions and interacting with-and influencing-the world in
which we live.

Sen’s focus is on individuals and personhood. He also talks about agency and how our
interests affect society. But his main focus is on individual’s wellbeing. This may be his main
criticism as well.

Date: 11-1-22
Human Development Index
Mahbub Al Haq (1990) thought that GDP was a vulgar Indicator. So he wanted to replace it
with another single indicator. The importance of HDI this is that it helps with the allocation
of resources.

Dimensions of HDI
1. Health
2. Knowledge
3. Decent Standard of Living

Indicators of HDI
1. Life Expectancy: Mean years of mortality, life expectancy at birth- 70.42 for 2021
2. Expected Years of Schooling and mean years of schooling (average years of
schooling) India: Expected years of schooling at 11.9 years, mean years of schooling
at 6.7 years
3. Purchasing Power Parity

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HDI value of 0.633, India ranked 132 out of 191 countries in the 2021 human development
index

Date: 12-1-23
Dimension Index
HDI: 1/3 [health. education. Income]
DI=Actual Value- Minimum Value/ Maximum Value – Minimum Value
 Life expectancy DI= 67.2- 20/ 85-20
The number of years a new born infant could expect to live if prevailing pattern of age
specific mortality rate at the time of birth were to stay the same throughout a child’s
life.
 Education DI= 11.9-0/18-0
On what basis are aspirational years calculated.
Expected years of schooling definition: number of years a child of school entrance
age is expected to spend at school including years spent on repetition.
Mean years of schooling definition: Average number of years, the population older
than 25 participated in formal education-
Categories: Illiterate, primary-complete/incomplete,
 Income DI= ln(AI) – ln(100)/ln(75,000) – ln(100)

It has changed from arithmetic means to geometric means because in arithmetic even if one
of the indicators increases, it makes it seems like there is overall increase. This may not show
that targeted indicator which is changing. Geometric one is better for policy makers, because
you can actually see which targeted indicator is increasing or decreasing.
Categories of HDI
 Medium: 0.550-0.699
 High: 0.7-0.799
 Very High: >0.8

Other Indexes
1. IA HDI
Atkinson’s method is used to calculate inequality

2. Gender Development Index

HDI separately calculated for males and females would give us GDI.

3. Gender Inequality Index

3.1. Dimensions [HDR Reports]
a) Health
 Maternal Mortality rate: maternal death rate per 1 lakh live
births. India- Rank 133

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
Adolescent fertility rate: annual number of birth rates of
women aged 15-19 years.
India- 17.2
 Combining the two will give you: female reproductive health
index.
b) Empowerment
 Males and females completing secondary education.
India- Female- 41.8% Male- 53.8
 Males and females having share of parliamentary seats
India- 13.4%
c) Labour Market
 Female and male labour market participation
India- Female- 19.2% Male- 70.1%

GII: Female reproductive health index + Female Empowerment Index + Female

Labour Market Index
o Prospera conditional cash transfer program- in Mexico, provides recipients
with cash contingent on three nodes of civic engagement: health, nutrition and
education.
o Bolsa Família was a social welfare program of the Government of Brazil.

Date: 13-1-23
Unsettled times, unsettled lives shaping our future in a transforming world, 2022
Report.

We are in Anthropocene era, there is a negative impact across the world through human
choices and positive impact also because of human choices. We are consuming ahead of our
basic needs and demands.

The calculated HDI method, a factor has been multiplied with Co2 emissions (per capita) and
material footprint (per capita)

Planetary pressure adjusted HDI.

The Unsettled times, unsettled lives shaping our future in a transforming world, 2022 Report
provides that there are certain uncertainties. First important component is dangerous pressure
created by Anthropocene. It is talking about uncertainties that are increasing, across the world
there is certain uncertainties that are felt. It is multi-layered. An uncertainty complex is being
created driven by
1. Dangerous pressure of Anthropocene
2. Pursuit of sweeping societal transformation- when industrial revolution took place.
Not always negative sense. The way families and cultural values are changing.

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3. Widespread polarisation across the world- somewhere the democratic policies are
not working. Freedom of choices and widespread unequal usage of media. Vicious
circle of inequality.

Example: What is happening in Joshi math. Now forcefully people are being displaced.
Humans are trying to alter the fundamental frame of the planet. Larger number of people are
alienated from political systems. Apart from that, the way information is being provided by
the digital world and new digital technology. AI is displacing several jobs as well as
displacing. Commodifiable data- that which can be used by anyone whichever way they like
to use. Negative threats are more. This kind of digital revolution is reducing participation and
leading to digital transformation. Mental distress which is affecting mental well-being is
affecting economic cycles which in turn is making people less productive. When mental
wellbeing is not there it will affect educational capabilities therefore productivity is affected.
Which is leading to poverty; therefore, mortality and health indicators are being affected.

RESOURCES – INDIVIDUAL CONVERSION FACTORS – CAPABILITIES – CHOICE –

FUNCTIONINGS

“My capabilities are being hampered due to mental distress.”

Through good governance, laws and regulations, all these uncertainties of life can be reduced.

Look into Nordic Exceptionalism

By 4 main pathways Anthropocene hampers mental well being

1. Traumatic events: The increase in extreme weather events often goes hand in hand
with losses or damages of housing or crops as well as injuries and even deaths of
loved ones. These experiences can cause tremendous human suffering, often leading
to post-traumatic stress, anxiety, depression, distress, grief, survivor guilt, substance
abuse and even suicide displacement of people, it is traumatising them. Example:
Uttarakhand.
2. Physical illness: Physical illness because of extreme climatic conditions. The health
of individuals in extreme cold. Re-emergence of zoonotic diseases
3. General climatic anxiety: Climate change can have two different effects on people,
depending partly on psychological resilience. It increases general anxiety and worries
about the future, which encourages some people to become agents for climate action
but may leave others feeling anxious and incapable of changing probability of
solastalgia.
4. Food insecurity: With increasing extreme weather events disrupting food production
and access, food insecurity is on the rise again after decades of decline. In addition to
being a threat to physical health, it is also a serious mental stressor because of the
pressures of Anthropocene, moving towards cash crops, nature of agricultural
production is changing, because of soil erosion.

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5. Biodiversity loss: Biodiversity loss can drive mental distress, especially among
indigenous and marginalized communities, leading to longer-term adverse
psychological and behavioural impacts, such as increased family stress, amplification
of previous trauma, greater likelihood of substance abuse and higher prevalence of
suicide ideation.

The report even talks about new drivers of unsettled lives

1. Violence: increasing insecurity. Newer kind of violence.
2. Discrimination/ Exclusion
3. Economic insecurity
4. Digitalisation
5. Data Frauds
6. Cyber Attacks
7. Digital inequality/ concentrated digital power: it is causing great imbalance as well.

There is a circular and intergenerational relation between economic inequality and mental
distress. This relationship between economic inequality and mental distress can perpetuate
economic inequalities across generations.

1. Financial shock
2. Unemployment
3. Food insecurity
4. Low income

It will affect a child’s development, if any of these factors are affecting. Even before child is
born, they can be affected by this.

Child health is impaired at foetal stage [specially in developing countries]

There will be adverse effect on brain and body development.

It may impair cognitive skills and physical and mental health.

It leads to high health expenditure and increased exposure to stressors.

Worsening mental health.

One policy does not fit all. The nature of poverty differs across

The report provides that this can be dealt with through the three Is.
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1. Investment
2. Insurance
3. Innovation: at the pace of other nations

Subjective Well-being [“SWB”]

First attempt to relate income and SWB was done by Richard Easterlin. Based on empirical
evidence of USA and 11 other countries. Fallacy of Composition- keeping in mind that what
is good for an individual is good for whole country. It was observed on individual levels that
when income increases so will well-being.
So when Easterlin did this study he found out the following- Easterlin Paradox- at a point in
time happiness varies directly with income, both among and within nations, but over time the
long-term growth rates of happiness and income are not significantly related.
 Within country analysis: Wealthier individuals report high level of subjective well-being
than poorer individuals
 Across countries: no comparable difference between SWB of countries which are deemed
to be wealthier and poorer. Wealthier individuals report high level of subjective well-
being than poorer individuals across countries. This was at micro level
 Longitudinal studies found that economic development of a country does not increase the
subjective well-being of an individual. Macro level shows no significant difference.

After revisiting his theory, he states that GDP and SWB/ Happiness have the following
relationship

SWB

SR LR

GDP

Richard Layard
 gave 4 reasons why higher incomes are not making us happier
1. Individuals give after one point of time more importance to relative income over
absolute income.
2. Adaptation: you get used to a higher income.
3. Advertisement in the modern world for creating wants that didn’t exist.
4. Human relationships are weakening and deteriorating. Community Cohesion is
reducing.

 7 factors affecting happiness

1. Family relationships

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2. Financial Situation
3. Work
4. Community and friends
5. Health
6. Personal Freedom
7. Personal values

Date: 20-1-23
GNI is based on 9 domains which are Based on 4 pillars.
1. Good governance,
2. Sustainable socio-economic development
3. cultural preservation and
4. environmental preservation

9 domains of GNHI – look at 2015 report for more details.

All these 9 domains are equally weighted. 33 indicators are there. There are variables that are
based on questions. This is because the index is based on surveys and questionnaires. It is
capturing living standards.

Alkire foster method is used to assign weightage. Gallup poll method used for measuring
indicators – it uses cantril ladder
1. Psychological wellbeing: (Most important) 4 indicators are used to measure. More
weight is given to the less subjective indicators. Spirituality: cultivation and
manifestation of compassion, positive and negative emotions. Quality of life is being
measured through life satisfaction measures.
2. Health: both physical and mental health
3. Time use: work life balance, important for formulating labour policies.
4. Good governance: people’s perception of government functioning, cultural diversity
and resilience. How much diversity is there
5. Education: knowledge value and skills
6. Cultural diversity and resilience
7. Community vitality: family relationships, social cohesion, if you are troubled, how
many people are there to help you.
8. Ecological diversity: less will be left for future generations, exploitative use of natural
resources
9. Living standards: artificial and authentic needs – indicators- asset building/
ownership, material comforts (measuring income), financial security

4 categories of happiness are being created through which you can capture happiness
1. Unhappy - <50%
2. Narrowly happy – 50-65%
3. extensively happy – 66-76%
4. Deeply happy - >77%

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Headcount ratio- it us used in calculating the percentage of people who are happy or not
happy, not the intensity in context of the given index.

Therefore GNHI= HH + (HU. AsuffU )

HH = percentage of people that are happy
HU = percentage of people that are unhappy
AsuffU = Average percentage of domains where not yet happy people have sufficient
achievements.

Date: 21-1-22
GNHI is a decomposable indicator. It is calculated on the basis of demographic
characteristics. Male/ female/ urban / rural. Higher the indicator, higher the level of
sufficiency achieved.

In 2012, World Happiness Report was calculated. It is completely based on GNHI. UNSDG
started calculating it. It has three main indicators.
1. Life evaluation: the average life evaluation is measured by 6 factors- GDP per capita,
healthy life expectancy, social support, generosity, perception of corruption, freedom
to make life choices. Level of corruption which is being made for 146 countries,
India’s rank is 132. Finland is holding Rank 1, Nordic countries coming in top 10 for
overall life evaluation.
2. Positive Emotions: limited to 3 emotions- laughter, enjoyment and learning/ doing
3. Negative Emotions: limited to 3 emotions- worry, sadness and anger
This report is based on benevolence, trust etc. mostly data is taken from Gallop Pol Method,
and Cantril ladder is used with this method.

Date: 23-1-23
Genuine progress indicator [“GPI”]
 It is based on index of sustainable economic welfare- ISEW (Cobb & Daly (1989))
 To break the hegemony of GDP, this was brought about.
 It addresses five key shortcomings of GDP
1. Very Poor linkage between consumption and quality of life
2. It fails to explain defensive expenditure that reduces welfare. This index clearly
classifies between defensive and non-defensive expenditure
3. Failure to address sustainability. Green GDP is calculated but it also doesn’t
include all the costs of climate change etc.
4. It does not include non marketed activities. Both the benefits and the costs.
5. Failure to respond to inequality.
 It takes into account benefit to individuals, society, etc. it’s a cost benefit analysis of
socio-economic well-being. The basis of GPI is still GDP- i.e the personal
consumption aspect.

GPI= Cadj + G+W-D-E-S-N

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Cadj= personal consumption exp adjusted to income distribution

G = non-defensive exp by govt (Capital growth) change in international investment position
is also added
W= takes into account non-market activities, non-monetised to welfare.
D= private defensive expenditure
E= Expenditure or cost incurred to meet environmental degradation
S= cost of social climate (cost of crime, cost of divorce, cost of gender inequality)
N= cost of depletion of natural capital

Social Progress Index [“SPI”]

 It is calculated for 169 countries.
 India in this index holds 110th
 Economic development in assessed based on this index. With the help of social
indicators

a.     Basic human needs 

i. Nutrition & basic medical care 
ii. Water and sanitation 
iii. Shelter 
iv. Personal Security 

b.     Foundation of well being

i. Access to basic knowledge 
ii. Access to information and communication 
iii. Health and wellness 
iv. Environmental Quality 

c.     Opportunity
i. Personal Rights
ii. Personal Freedom
iii. Inclusiveness
iv. Access to advanced education

Date: 24-1-23

Nordic Exceptionalism (Chapter 7- 2020 UNHR Report)

1. Quality of institutions
2. State of Democracy
3. Low Rates of Corruption
4. Social Support System
5. High sense of autonomy and freedom

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Highly correlated and mutually enforcing.

Factors behind Nordic exceptionalism

1. Welfare State generosity

It works through two channels –
a) Public expenditure
b) Benefits: effective in kind and cash transfer.
c) Easy access to welfare schemes
d) if majority of people in your country is occupied in labour- it is highly unionised,
labour regulations etc
2. Institutional quality
Quality of govt. depends on two dimensions -
a) Democratic Quality: it is related to access to power. Freedoms of rights, freedom
of association
b) Delivery Quality: talks about exercise of power. For example: how govt. policies
are able to control the rule of law. If delivery quality is good and consistent, it will
lead to institutional goodwill. It stabilises economy, society and people’s
expectations.
3. Freedom to make life choices
Autonomy, sense of agency to take actions and deal with the consequences. Freedom
comes through three ways –
a) Material security/ material prosperity: scarcity in materialisation needs to be
removed. Reducing securities
b) Democratic political institutions: it will remove or reduce political oppression.
c) More tolerant cultural values: will increase freedom of expression, social
solidarity
4. Less Income inequalities
Lowered income, gender etc equalities
5. Trust in other people and social cohesion
a) Connectivity amongst people is very good- connected to the people
b) Good social relations between the groups
c) Focus on common goods- community development
6. Less vulnerability of economic insecurity
7. Social comparisons are less
They have an egalitarian society. Income gaps and other gaps are very less. Because
of social connectedness and generosity, society is equal. Social comparisons less=
herd mentality lesser etc.
8. Well-functioning democratic institutions
They are able to keep their citizens satisfied, happy and secure.

Drawbacks

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Smallness of size – can’t fairly compare big countries and this, suicidal rates are increasing-
recent data is showing a decline, no perfect studies on complete homogeneity, extreme cold
weather conditions. From the pov of Sen you will see that extreme weather is an obstruction
on SWB.

Date: 25-1-23
Ecological Footprint and Biocapacity
Many indicators worldwide are constructed by taking the human development indexes and
the SDGs. How much pressure we’re putting on the environmental resources. There is a
demand side and supply side.
While talking about the biosphere and the pressure that human beings are creating – we are
talking about ecological footprints accounting measure. This takes into account demand
and supply of nature depends on consumption habits.

Demand side= Countries use of resources [cropland, forest land, fisheries]. Countries usage
of cropland, forest land and fisheries ground to provide resources. Ecological footprint
measures pressures that humans are creating on biosphere. How fast are human beings using
the resources and generate waste compared to how fast nature absorbs waste and generates
resources.

Supply side= biocapacity of the region. Productivity of ecological assets. What we are
consuming, what is the limit of the ecological assets and their productivity. Similarly on the
basis of this demand side and supply side is calculated. Whether a country is ecological
creditor or debtor, whether they have deficit or surplus.

Whenever ecological footprint [EF] is more than biocapacity = Ecological/ biocapacity

deficit.
In this case you can use resources exploitatively or abusing them or importing resources.
Over utilisation of resources happens.

EFPP- Ecological footprint per person

Both are calculated and both have a common unit called global hectare.

Global
Hectare

years

1965 2020
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The gap is increasing. This above graph was calculated for 200 countries. World bio-capacity
per person is 1.6 and world ecological footprint per person is 2.8, therefore there’s a deficit of
1.2. The ecological footprint per person was 0.6 in 1965.

India
 BC- 0.4
 EF- 1.2
 Deficit- 0.8

Analysis
You will have to borrow resources, because you are in deficit, this will increase prices and
therefore inflation. For example: oil prices

Combinedly HDI with Ecological Footprint (no indicator for it) = SDG index

Date: 27-1-23
THEORIES OF ECONOMIC GROWTH/ MORALS MADE TO DEFINE AND EXPLAIN HOW
ECONOMIC GROWTH IS TAKING PLACE
All the theories depend on the way economic systems are being defined. The theory was
given by Adam Smith. Before that a feudalistic society was there, before that mercantilism
was there. Smith’s theory was based on Mercantilist theory.

Neoclassical theory is based on certain things created and defined by Adam Smith. Before
going deep into the theory. Basic features of Capitalism.

Capitalism is defined and characterised by 4 sets of institutional and behavioural

arrangements.
1. Market oriented commodity production- not social oriented, not keeping in mind
ethical values and what society requires. Good is characterised by use value and
exchange value. There is a focus on exchange value instead of use value. Everything
is market oriented, how it flows to consumers. Social relations depend on that. Use
value is important but exchange value is more important because an item will be sold
on its market value and money will be earnt and further investments will be made on
that. This is what leads to
2. Private ownership of. Private ownership does not translate into socio-economic
benefits. Adam Smith believed in labour theory of value- when labour is adding the
value, the part of the labour that is adding value, part goes to labour and part to the
capitalistic ownership. The latter gets the major part. Therefore, there is no harm in
going for private ownership.
3.
4. Individualistic acquisitive and maximising behaviour by most individuals within the
eco system.

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Investments are coming from savings please.

Date: 30-1-23
Pf= f[L,K,L]
EGOR Standard of Living = f{I, K Accumulation}
I= f{Division of Labour}
DOL= determines labour productivity

This theory shows circular cumulative causation. However, the key element of Smith’s theory
is Capital Accumulation. In Smith’s theory the economy will continue to grow until it reaches
a stationary state.

Time

Though the stock of capital increasing, there will also be a growing competition for workers.
They will have to pay workers more leading to lowered profits.

 Labour Demand = f{wage fund}

 Labour supply is a function of or depends on = f{w- w}
W= subsistence wages, wages required to meet your basic needs.

The Growth Cycle is as follows:

 Increase in Capital
 Expansion of Production
 Expansion of Market
 Increase in Division of Labour
 Increase in labour productivity
 Increasing returns of scale (economies of scale)
 Increase in surplus -> back to Increase in Capital

How will innovation increase?

1. Improvement of Dexterity
2. Saving of Time
3. New inventions
4. Innovative works due to learning by doing

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At stationary, smith says that there will be no growth in per capita incomes, wages are at its
subsistence level and profits are at the minimum. No net investment -> population remains
unchanged and total income is constant.

Date: 31-1-23

Marx’s Economic thought [1818-1883]

His work is based on classical theory. He refined and expanded it and with this a new theory
of capitalism emerged. Marx theory has many things in common with smith. The major
difference between other classicists and Marx was that Marx was completely based on social
perspective.
He explained his work Mode of production. Capitol- Three volumes. Mode of production
keeps on changing with the change in social organisation. The systems are changing. He
defined three stages where the systems are changing
1) Primitive Communism
2) Ancient slavery
3) Feudalism
4) Capitalism

The entire economic development defines 5 types of societies-

1. Primitive communism: this is the most basic stage, producing for one’s own
survival, not profit motive. It subsisted on hunting followed by agriculture. Produced
commodities are equally distributed. There is no hierarchies in society
2. Slavery: through agricultural production and owning livestock and animals, surplus
came into being.
3. Feudalism: With extreme slavery and inequality eventually, a concept of serfdom
starts. Feudalism is based on control of land ownership, assets distribution and
ownership of mode of agricultural production. Better technological advancement.
Distribution in the form of wages and commodities is on the land owners. Mode of
production is changing. Example: decisions on seeds, which crops, how much
production
4. Capitalism: emergence of capitalism is bringing two classes – bourgeoise and
proletariat. Workers are the proletariats are the ones adding value to the production,
this is appropriated by the capitalist. Use value and exchange value came into play.
Focus is not on use value; it is on exchange value. There is a profit motive, and profit
is gained by the capitalist. Marx defines socially necessary labour. He defines labour
as homogenous. If one quality of product is produced using certain amount of labour,
if that amount is double, the quality of the product would increase. In capitalism M-C-
M is happening. In Capitalism
the following is happening M&C ---- P ---- C&M. Money starts from his pocket and
ends up in his pocket. It is coming back to the pocket> Appropriateness of more and
more wealth becomes the role motive of his operation. In his model, use value is
never important for a capitalist model. It is a passionate change for value.

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In the last stage, commodities are sold for the exchange in the market or converted
into money. This is the basic thought behind Marx. In different social organization,
things are changing. The need of converting something into another thing leads to
very very clear cut in class changes. The exploitation will lead to such a level that it
will lead to collapse of the system. The growth that is happening will change. An
extreme of socialism is communism.
Theory of economic development. Political thoughts for Marx. Given the thoughts or
discusses the thoughts which forms the basis of economic development.
Middle class was earlier not there, it acts as a cushion for capitalism. There is still a
passionate change for creating exchange value.
Crony capitalism
It is not coming in the form of class struggles.
5. Socialism: A commodity is being produced and sold for money and with that money,
other commodity is purchased.
In socialism C-M-C [Commodity – Money – Commodity].

In Marx’s Capitalism, it was M-C-M [Buying in order to sell]

Surplus is being created in this system, why? Because of value addition of labour.

Money Commodity Commodity Money

[M] [inputs C] [higher sales value due to production process C’]
[M’]

C’ > C; M’ > M

Systems are changing because Mode of production is changing in every system. He explains
everything from social perspective. The interrelationship between the participants within
society is evolving.

Date: 1-2-23
1) Industrial Capital
It is representative of the Capitalist mode of production. It explains how surplus value
is being created and appropriated by the capitalists.
2) Labour Power
It is a unique commodity in Marx’s model which is converted into surplus value. It
depends on how this value is being provided by the person possessing labour power –
for how long eg. for whole life of a slave.

Assumptions of Marx’s Model

1. In his model, production is based on two types of capital
a) Constant Capital (c): non-human factors/ means of production
b) Valuable Capital (v): labour
2. Labour is homogenous and perfectly mobile

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3. There is perfect competition in the market

4. Wages remain at subsistence level. They can’t reap benefits of their labour.
5. All factors are owned by capitalist only.

Output = (c+v) +s
S= surplus value
 Rate of Surplus value: it plays a significant role. The rate at which surplus is
increasing = S/V
 Rate of Profit: rate at which profit is changing.
Rate of R= S/ C+V
Surplus ≠ Profit
Surplus represents the additional value being generated by labour who are paid at subsistence
level. But after generation of surplus, the capitalists have to pay for constant capital as well.

Organic composition of capital= C/ V

How does accumulation of capital take place?

1. Primitive accumulation
Systems are changing from feudalism to capitalism. Workers are being freed from a
feudalistic country. But being subjected to the perils of a capitalistic society. A new
working class emerged called the proletariat. On the other side, bourgeois, the
wealthy class having monopolistic control over means of control also emerged.
2. Capital Accumulation
At this stage, capitalists emerged as a ruling class. At this stage the power got
concentrated in the hands of the capitalists. Excessive capital accumulation leads to -
a) Economic concentration
It is an outcome of 2 forces
i) Competition among capitalist- concentration in fewer and fewer hands.
ii) Technological improvement
Weak capitalists are being thrown out by strong capitalists through
technological improvement.
b) Tendency of Rate of profit to fall
 Ceaseless accumulation of capital
 In this organisation composition, value is being added by labour and they
are thrown out due to replacement of labour by technology. This creates a
pool of unemployed people. This is technological unemployment.
 More consumer goods are being produced but overall number of
consumers in the market is down. This leads to production also falling and
demand for capital also following.

How this fall in rate of profit can be reduced?

1. Increased rate of exploitation – by increasing working hours
2. By giving depressing wages below subsistence level

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3. Foreign trade enhancement

They aim at acquiring better technology to reduce cost of capital

c) Sectoral Balance
A balance in capital and consumer goods needs to be maintained to stop the rate
of profit from falling. This imbalance occurs due to fierce competition among
capitalists.

Date: 3-2-23
Capitalistic Accumulation has 4 consequences:
1) Economic concentration:
The power, wealth is concentrated in a few hands. This will lead to the next consequence.
2) Tendency of rate of profit to fall:
Rate of profit = S/c+v (s- surplus c+v is total capital). The rate of profit will ultimately fall.
The rate of profit will ultimately fall and cannot increase through exploitation. They try to
find capitalist through labour saving techniques. OCC = Organic composition of capital.
Commodity in marx model = C + V + S
S = S/V
OCC = C/V

Contribution of constant capital is increasing and variable capital is falling. There is more
usage of capital. Because of technological improvement, newer and newer modes of
technological improvement is happening. They are exploiting labour also, but there is a
practical limit to doing that. Labourers are already on subsisting wages, cheap means of
production, constant capital. The problem is that the organic composition of capital is
increasing, but labour is not increasing because they are using labour saving techniques. This
leads to unemployment. This is technological aspect leading to unemployment of people.

3) Sectoral imbalances and crisis:

Some capitalist income is going in the profit of people, because of unemployed reserve army
of labourers. Their consumption of consumer goods will decrease.
Capitalist:
i. Consumer goods – when being produced and coming into market, less people are
doing it. Production of consumer goods will decline so capital goods is
decreasing. These people should come together and raise a voice against
exploitation. Fall of economic growth, is there.
ii. Capital goods

4) Alienation and misery of working class:

Pure economic theory of Marx

PF = f [L, K, N, T] – 1
T = T(I) – 2

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I = I(R’) – 3
Rate of Profit = S/C+V – 4
W = W(I) – 5
E = E(I) – 6
It is a function of investment or level of employment, which is in his model a level of
employment. Why level of employment is increasing because investment is increasing.
E = W(I)

Employment depends on the level of investment. Consumption depends on wages

Technology is a function of investment. Technology in investment has a two way investment.

As it is the case with other classist, technology is the motor of the enter economic growth/
process. Investment is needed to take full advantage of economic progress. Technological
progress also provides the opportunities for profitable investment.

Combination of these two or relationship, it is a two-way relationship – technological

progress depends on investment.

Rate of Profit = S/C + V

Date: 4-2-23
THE SCHUMPETERIAN GROWTH PARADIGM

Schumpeter was a follower of Marx.

Democratic capitalism
What Schumpeter believed is that the capitalist machine is essential for economic growth and
market system is essential. The breakdown of the capitalism and capitalist system happens
due to the lack of appreciation of what capitalism can do. Or rather the system is not able to
provide a system which has the necessary conditions in which capitalism will prosper.
Capitalist play a big role in deciding what is being produced etc, however the system is
unable to acknowledge this. State has a role to support the conditions under which the state
could prosper. Not the failures of capitalism or its very success would lead eventually to the
slaughter of the goose that laid the golden eggs.

He explains his model with business cycle, how its

Innovations are happening, role of entrepreneurs was very important.

Q= Ff{L,K,N,T,V}

V= Socio-economic environment or socio-cultural environment in which economy is

important is playing a very important role

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Savings are required and they are a function of capitalist profits

S= S[R,W,r]
R= Profits, r= rate of interest, W= Wages
I= II + IA
II = Induced investment – short term changes due to production of goods- output, incomes,
sales, profits etc determine induced investment
IA= Autonomous investment –

II = f{R, r}
r= rate of interest is inversely proportionate to induced investment
IA= f{RD, TP}
RD= Resource discovery
TP= Technological progress

5 Forms of innovation
1. Production of new commodities or new products.
2. Using new methods or techniques of production – untested method, there is a risk for
which the innovator should get reward
3. Raw materials or sem-manufactured goods.
4. Opening up of a new market – inter to intra industry trade
5. New organisation of an industry – creation or breaking up of monopolisation.

Resource discovery and technical progress

RD={Es}
TP= {Es}
Entrepreneur is the one who when created with socio-cultural environment. He has to think
about how to combine resources.

He differentiates between three participants

1. Capitalist: who is putting in the money
2. Entrepreneurs: ultimate determining factor
3. Managers: once production has started, and decision on manufacturing as been made,
endogenous factors of the factory, labour, working

Supply of Es= {R, Sc}

R= Rate of profit
Sc= social climate- social values, education system, class structure, attitudes.

Date: 6-2-23
Δ O= k [I-S]
K is a super multiplier

W= W(I)

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Sc = Sc (R/W)
R: Profits (in this capitalistic model profits should not fall-through governmental regulations,
excessive trade union activities)
W: Wages

We want both R and W to increase simultaneously, this is the socialistic environment.

Output/ GNP = R + W [National income method]

What is needed for economy to grow? Creative destruction

A perennial gale of creative destruction. These perennial skills are due to the efficient
management and sound institutions. While a process is going on it is initiated and is being
absorbed by the whole economy, it then reaches its peak. When it starts falling
simultaneously new production, new markets, new products, new supply of products may
come about and soon that old production will become obsolete.
Instead of explaining the economic growth and development, he explained this phenomenon
in long waves of business cycles.

Waves Names
 Kondratieffs – length of cycle is 60 years
 Juglar – length of cycle is 9-10 years
 Kitchin – length of cycle is 40 months

Digital network AI

petrochemicals
Chemicals
Electricity
Rails

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1785 – 1845 1845-1900 1900-1950s 1950-1990 1990-2022 2022-

(60 years) (55 years) (50 years) (40 years) (30 years)

A circular stable flow is there for new innovations that keep happening. The older
innovations helped speed up the process.

Initially the development started with state support and credit creation. Better transportation
of consumer goods to various places, unification of domestic markets increased. Inside the
market distances reduced, this put downward pressure on prices, consumption increased,
demand increased more, more competition, this leads to growth of particular sector coming
down, however in the meantime some other industries start developing in the process.

What happens to the factors of production when the structural changes are happening. When
production of these particular products come down. Several people will be unemployed, they
will soon be rehired into new industries. Unemployment will be temporary.

The static cycle (moving from static to another static position) will shift to a dynamic cycle.
He explained the process of economic development with static and dynamic economic
development.

This problem of unemployment was not understood or acknowledged by Schumpeter.

Hindrance of economic growth and development in Schumpeter’s model is labour law
legislations, paying more wages, social security, and as a consequence of this profits will fall.

Date: 7-1-23
HARROD - DOMAR MODEL GROWTH MODEL

Is an extension of Keynes model- average propensity to save etc

 Classicist – focused on capital accumulation and it is a supply side model their main
focus was on producing things, Smith’s equation showed the production function
started from capital accumulation
 Keynes –

This model tried to take into account both of these demands. It is a self-correcting
equilibrium. There are certain times when the equilibrium becomes disturbed. whether it is
self-aggravating or self-correcting. Whenever equilibrium is disturbed, whether it
automatically coming back to equilibrium or does it get further pushed away.

Assumptions
1. Economy is starting from full employment level of income.
2. The model explains closed economy. Here it means that while explaining the model it
is excluded international trade policy, therefore
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3. A fixed proportion of capital output and constant ratios of capital output and saving
output. Average propensity to save = marginal propensity to save.
4. No lag in the variables like saving, investment, income, output. The system adjusts
automatically. There are constant returns to scale. When you are increasing output for
example.
5. Economy should avoid conditions of secular inflation.

Growth Rates [only two sectors -household and business]

 ACTUAL GROWTH RATE [Ga] – which is actually happening in the economy.
Ratio of Savings to income/ Ratio of actual capital output ratio
S= S/Y, C= I/ ΔY
Savings is equal to investment, S=I
Therefore Ga = ΔY/Y
Ga= s/c
 WARRANTED GROWTH RATE [Gw] – which is related to population and will put a
ceiling on the growth rate. Gw is the rate that induces just enough investment. To
match planned savings and therefore to keep capital fully employed. This growth
rate is about required capital. HOW MUCH CAPITAL IS REQUIRED TO
REACH PLANNED SAVINGS?

Gw talks about required investment and Capital. Cr is required to satisfactorily

use the capital, to actually produce the commodities that the people want

Cr= Δ Kr/ΔY = I /ΔY

Cr is the capital that keeps entrepreneurs satisfied. Cr is essentially the amount of
capital used for the production of a given output.

Idealistic situation is where Ga= Gw, when ex-ante plans are not matched by
actual situation.
Gw= s/cr
When Ga > Gw (c < cr)= shortage of capital, inflationary pressure
When Ga < Gw (c > cr)= more supply of capital, production capacity is greater,
deflationary pressure

Date: 9-2-23
 NATURAL GROWTH RATE (Gn)– puts a ceiling on the actual growth rate.
 Gn= l + q
 L= actual labour force
 It defines the productive capacity or long run full employment equilibrium.
 It creates a ceiling and sets an upper limit to actual growth rate. Actual growth rate
cannot go beyond natural growth rate.
 Dr. Joan Robinson: When the three growth rates are equal it is the golden age.

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 When Gn < Gw = this means that population growth rate is low, when more
capital is there and lesser natural growth, depressionary pressures develop.
 Gn > Gw = this means that population growth rate is high but warranted growth
rate is less, the capital required. Inflationary pressures. Structural unemployment
problem will be there. An issue of stagflation will appear – unemployment
increasing and so is inflation.
 How to fix Gn > Gw = reduce population growth rate. Through monetary policy
we can increase interest rates in order to increase savings. Move to more labour-
intensive measures – this will reduce Cr which in turn will increase Gw
 How to fix Gn < Gw

Growth

Gn

Gw

I/Y

Growth

TIME

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 Criticisms
1. Using factors of production in fixed proportion
2. Taking all the variables in one particular model – he said that savings to income ration
and capital to output ratio is given.
3. Restricting it to closed economy- does not account for leakages and injections

 Benefits
It calculated particular growth rate and capital output and how much savings is therefore
economy in need of- for example: if 7% is your targeted growth rate and your Capital output
ratio is 3%, you will need 21% savings (7%= s/3% = Ga= s/c).

 Change in Functional Distribution

In case Gn> Gw – there is inflation, there is more profit amongst the entrepreneurs, their
savings increase, when S increases

In case Gw < Gn – there is deflationary pressure.

Date: 13-2-23
1) Traditional: No technological development and not dependent on any other kind of
technical sources. Social structures are hierarchal. Any particular good or service
coming from outside are basically an internally built society, not depending on flow
of goods from outside or inside.
2) Pre-Conditions
3) Take – off
4) Drive to Maturity
5) Age of High mass consumption

Date: 14-2-23
 Pre-conditions: At national levels government interference is needed at national
level. If we take into account political dominance, we talk about reactive dominance.
Countries at pre conditions to take off have positive and negative demonstration effect
on the followers. The impact of already industrialised nations come as demonstration
effect. Negative demonstration involve imposing themselves on countries that are
following- being oppressive. Walt Whitman Rostow stated that these countries
compel the following countries. “Without affront to human dignity and national
dignity caused by intrusion of more advanced power, the rate of modernisation/
industrialisation of traditional societies would be much slower than infact it has
been”. Positive and negative effect created a local elite which is reactive nationalism
which accorded to political independence.
 Take off: Base for modernisation is ready. Economies who have reached this stage
identify leading sectors for their economic growth. With further modernisation, they
try to focus on the development of the leading sector. You have to identify a leading
sector – you can also focus on certain other sectors. The workforce is changing.

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Nature of workforce is changing, population starts increasing. Economy starts

developing on national and international fronts. About 10% of net investment (gross
domestic capital formation) is needed at this stage and enlarged army of entrepreneurs
and technicians. Institutionalisation of sources of capital. Time period where economy
entered into the time stage where
 Drive to maturity: Similar to what Schumpeter talked about. Economy is being
identified for the leading centre. It is time to diversify. Diversification of the industrial
structure. More modernisation. Where a society has effectively applied the range of
modern technologies. New leading sectors and innovations. New sectors have
developed. This is the time period where urbanisation is speeding up. Share of
population in rural and agricultural sector is declining. Modernisation is side by side
encouraging more modernisation. People from the backward sector and resources
started moving from the backward sector to industrial sector. A service sector starts
emerging. Consumption Pattern starts changing. Rise in real income.
 Age of High mass consumption: though consumers consumption basket has started
going beyond the basic needs. This is because disposable income and living standards
are going up. The focus is to increase consumption. Of durable consumption good or
goods with high exchange value. According to Rostow the age of high mass
consumption, there are 3 directions where a mature economy can turn –
1. Economy starts to offer an increased security, welfare and leisure to the
working class. Ultimately whatever is produced has to be consumed. Mass
consumption is only successful when majority of population can consume the
commodities made by the industrial sector. Therefore, measures need to be
taken, so as to ensure that people are able to consume more durable goods.
2. To provide enlarged private consumption: increasing or encouraging people so
as to ensure that private consumption goes up. There should be an individual’s
capability to consume more. Larger base for consumer goods.
3. To seek enlarged power for the mature nations on the world scene: a
dominating position.
Criticism
 People believed that Rosteua was trying to impose American model on all nations
 Some nations skipped some of these stages
 One size fits all is not the right way to explain development.
 People provided that bottom to top approach should be focused on. Merely focusing
on leading sectors is not enough some local industries may also be looked at.

Date: 15-2-23
STRUCTURAL CHANGE MODEL – ARTHUR LEWIS (1979)
 Created it for Developing countries – model on how they could transform themselves
 Also called dualistic model because focuses on two sector economy.
 Only when there is a transformation from traditional sector, highly populated,
backward sector to an urbanised, modern, industrial sector.
 Instead of a modern manufacturing sector. Modern agricultural sector can also be
taken as an example.

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 Underutilisation of resources is arising from structural or institutional factors.

Underdevelopment is an outcome arising from structural and institutional factors
arising from dual structures. As long as transformation happens economy will start
growing.

1) Traditional Sector
Assumptions
1. Concept of surplus labour. Surplus labour only exists in traditional sector not
in modern sector.
2. Because there is surplus labour, the marginal productivity is zero.
3. Wages are given. They are set at very low level and they are determined by,
average productivity of labour and not marginal productivity of labour. If it is
on the basis of MPL the wages are determined by the demand of labour – a
downward sloping curve.

[Graph Below]

TP TS TP= f [L,k,t]

QLA
Surplus Labour

APL = Tpl/l
W mpl
Ls

MS TPm= f [L,k,t]

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Tp3 (K3)

TP2 (K2)

TP1(K1)

Qlm
L1 L2 L3
MPL

D3 QLM becomes elastic after this point – louis turning

point
D2

D1
W Supply of Labour
a b c Mpl3
Mpl2
Mpl1
L1 L2 L3 Qlm
In this sector, the earnings are reinvested, therefor allowing for higher levels of production.

Assumptions
1) Modern sector wages are higher than traditional sector
2) Wages determined by MPL.
3) Employers are earning profit in modern sector
4) They are reinvesting their profits.

Eventually the supply of labour from perfectly elastic (because there is surplus in agricultural
market) will become upwards sloping because it will become elastic in nature.

Date: 16-2-23

Till the point where labour is in surplus. They are giving constant higher wages. However,
when the surplus is exhausted, higher wages will need to be paid.

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Criticism
 There is an assumption of a continuous supply of labour. There is also assumption that
there is constant capital consumption and that labour is always being exhausted. What if
the capitalists however are moving to sophisticated labour-saving technology – i.e greater
automation. This will lead to urban unemployment or shift back to agricultural sector.
 What if the profits are not being reinvested into the modern sector and instead there is
capital flight. If this happens, growth is not happening. This is leading to share of workers
remaining the same.
 He assumed that higher sector wages are always higher and given. Even though modern
sector unemployment happens, wages still go up. They don’t remain stagnant.
 Louis assumed that the modern sector curve is upwards. He assumed diminishing
marginal returns in both the sectors however there could be increasing returns to scale as
growth occurs.
 Premature deindustrialisation may occur wherein it’s a reverse movement.

D2
D1

W A

O D2 D1

Q1 = OD1 AL1
Q2 = OD2 AL1 (labour employment is not increasing)

Date: 20-2-23
BALANCED GROWTH THEORY
- Paul Rosentein Rodam. Also called Big push theory.

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- This model is being prepared for eastern and south eastern European Countries after
WWII.
- How a push can be given to developing countries so that they don’t fall within vicious
cycle.
- He talks about a path of equilibrium on how path of growth may be achieved. He talks
about continuous equilibrium instead of breaking down the disequilibrium. He never
spoke about a static equilibrium.
- We have to overcome certain formidable and pervasive obstacles to economic growth.
- His plan is for industrialisation. He assumes that there’s a large population in agrarian
sector and how with industrialisation, this population can be absorbed. For countries
to overcome this obstruction of growth and backwardness require critical minimum
investment.

Keywords
1. Indivisibility: the source of economies of scale. They are of three kinds
i. Indivisibility of supply side/ production function: his emphasis is on social
overhead capital. Electricity supply, communication, utilities, transportation etc
need to be continuously supplied. Lumpiness of capital, big amount of capital or
investment to give a big push to economy. Producing a particular commodity after
investing in social overhead capital will lead to. Your investment planning is
coming in huge chunks. Social overhead is irreversible in time. It creates a base for
a long period of time. Better to construct your own network. SOC’s cannot be
imported. They have high durability. They have a long gestation period. For their
own production and development, they require minimum industry mix of public
utilities. An SOC cannot be developed with a small amount you need a great size
of investment. It should precede directly productive activities. If there are ten
industries – you must give big push to all of them.
ii. Indivisibility of Demand: He gave an example of shoe factory – there is one shoe
factory that is just set up, in the rural area adjacent to this factory there is agrarian
sector where MPL is 0 and disguised unemployment is there, now people are
working in the shoe factory and start earning Income, where will they spend
except shoes – you will need other factories to satisfy the growing demand, for
example textile industry. How simply focusing on one country will not suffice.
Demand of one commodity will create demand for other industries. This focuses
on complementarity
iii. Indivisibility of savings: focused on marginal savings. How every increase in
income is leading to an increase in savings.
2. External Economies of Scale: they form the basis of the growth of external
industries. Many people will work and be incentivised towards industrialisation
3. Complementarity: How big push in a certain industry leads to growth across all
industries.

Date: 21-2-23

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He emphasised on all marginal savings. It later applied to the underdeveloped economies as

well. There was an automatic trickle down. His balance theory is being supported by many
prominent economists. One was Ragnar Nurkse and Hans Singer. A simultaneous
synchronisation of all the industries in the economy in order to break the vicious cycle in the
economy. A schronised investment is needed in all the sectors is needed according to Nurkse.
Hans Singer’s entire emphasis was on agricultural and industrial sector. Both should get best
push.

Addition to this theory by Nurkse

6. This kind of huge investment is only possible by government expenditure provided
Rodam. The investment can come through private enterprises also. How you are
administering the investment all is well. The motive of this investment will be
different.
7. Open markets – larger investments – more movement of capital – countries will
produce more. Nurkse is saying that international trade will not always lead to a
positive effect on trade. Underdeveloped economies who are selling goods outside
their markets are generally selling primary products with low low-income elasticity.
Relying on international trade for income and savings is not beneficial for those in
underdeveloped countries.

HIRSCHMAN- BALANCED THEORY OF UNBALANCED GROWTH

- Thinking about balanced growth is easy but not possible. Because of the lack of
availability of manpower, money, capital. Deliberate unbalancing is required to
achieve a certain level of growth.
- The policy makers have to strategically select a leading sector or leading industry.
Rosteau talks about intake of stage and strategically investments. these industries will
form the base which will help push the other industries.
- He focuses on externalities and complementarities. He selects the industry with the
highest growth linkage. After steel is being produced, how many other commodities
are being produced because of that. For every country leading sector is different.
- After the industry has grown, you may switch to another industry.
- Government can 1) Investment in social overhead capital or 2) in directly productive
activities.
- The focus of the economy should be
1) Investment on divergent series: if a country is focusing on SOC they will create
more externalities. It creates more appropriates less. Done by gov. authorities
because they are large scale investments. The motive of this is social welfare at
large.
2) Investment on convergent series: DPA’s are convergent series. They will
appropriate what is being created in the industries. It is the consumption of the
goods that the industries. It appropriates more creates less. Done by private
enterprises. The motive is of profit.

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DPA

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Availability and Cost of SOC

Output across the curve is the same. More infrastructure more transformation more utilities
etc is coming which would increase the production of activities. This is when the curve is
moving upwards.

Development via shortages – manufacturing a particular product without investing in social

infrastructure (water, electricity, transportation) this is going to create pressure on the system.
Development via excess capacity.

Input output matrix

BACKWARD LINKAGE - - - LEADING SECTOR - - - - FORWARD LINKAGE

In the initial years of development this method was being used to calculate linkages. They
show the interdependence of the sector on each other.

If iron and steel sector is selected as leading sector – they have certain requirements and have
highest linkages. Just because you are focusing on sector with more linkages need not mean
that highest amount of development will happen

BACKWARD LINKAGE - - - LEADING SECTOR - - - - FORWARD LINKAGE

Mining Sector Iron and Steel Car Manufacturing

 Iron and Steel: backward and forward linkages are high

 Paper and Paper products: backward and forward linkages are high
 Textiles: backward and forward linkages are high

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Hershman stated that products that are at the middle of the production process have the
highest backward and forward linkages.

 Final Manufactures where Backward linkages are high but forward linkages are low.
 Grain mill products (89 Backward linkages) (42 forward linkages)
 Apparels and leather products

 Final Primary products where Backward linkages are low but forward linkages are high.
 Fisheries, Agricultural services

Enclaved development
A Particular regional industry is developing because of foreign investment.

Date: 23-2-23
[Did not teach]

Date: 24-2-23

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