Diksha Mission Economics No.

1
Other Relevant Topics- Economics
Industrial Economics, New Growth
Theories and Model
Industrial Economics
THEORIES OF INDUSTRIAL LOCATION
Weber’s Theory of Industrial Location
 The theory is also known as Pure theory of Industrial Location/Least cost theory.
 Alfred Weber gave his theory in 1909 and is purely deductive in its approach.
 He considered both transportation and labour cost.
 According to this theory, the industry will be located where these costs are minimum.
Assumptions of the theory:
a. Assumes fixed labour centres and unlimited supply of labour.
b. Fixed points of consumption.
He considered two factors:
Primary Factors 1. Transportation costs Secondary Factors 1. Agglomerative
2. Labour costs 2. De-Agglomerative

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 He even considered raw materials which can be either localized or distributive. Therefore,
transportation cost is a function of weight of raw material to be transported and the distance
to be travelled.
 The factors which affect transportation costs are:
1. Type of transportation system and the extent to which it is used,
2. The infrastructure of the region like kinds of roads, environment, etc.
3. The nature of goods in terms of their quality, etc…
 The location of production depends upon following factors:
1. The type of material deposits present in the location,
2. Nature of transformation into the products.
Agglomerative Cost:
 If production takes place at one place and its effect is the reduction in the cost of production,
then it is agglomerative in nature. It has the advantage of cheapening of production or
marketing that results from the fact that production is carried on at one place. It will be
encouraged when coefficient/ index of manufacturing is high.
To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 De-Agglomeration is the cheapening of production that results from decentralization of
production, that is, production takes place at more than one place.
 Weber also gave the concept of “Split location”, in which production process can be divided
into different parts, depending upon the nature of raw materials, industry and market. For
example, the first part of the production can take place near the point where raw materials
are present, while the later divisions in the production process can take place where final
consumption has to take place.

Market Area Theory

The theory was given by Tord Palander. It is simply an extension of Weber’s theory. It focuses on
the idea that given the location of materials and prices, where the production should take place.
Also, given the place of production, how does price effects the extent of area in which a producer
can sell his good.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
Central Place Theory
 The theory was given by Losch. He ignored all the cost differences.
 According to this theory, the industry will be located where revenues are maximum because
of uniform resource endowment, ignoring all the cost differences. So the industry will be
located at a particular side where the revenue is maximum.

Geographical Theories of Industrial Location

Central Place Theory: The theory was given by Walter Christaller.
 According to him, the towns with lowest level of specialisation would be equally spaced and
surrounded by hexagons spaced hinterlands.
Renner’s Theory:
 He classified industries into four types: Extractive, Reproductive, Fabricative, and Facilitative
 Manufacturing industry will be located at a point which provides optimum access to the raw
materials like labour, power management, etc.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
Rowstron’s Theory:
 According to him, the factors which can restrict the location of an industry are:
Economic: the most profitable location for the industry.
Physical: the availability of appropriate market.
Technical: Where there is easy availability of technical know-how.
INDUSTRIAL POLICIES IN THE ECONOMY
Following are the policies which were formulated for the development of Industrial sector of our
economy before the New Industrial Policy of 1991.
1. Industrial Policy Resolution (1948):
This Reflected socialist ideas
Considered Indian economy to be a mixed economy, consisting of both private and public
sectors.
It imposed restriction on the foreign capital.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 The industries were divided into four categories:
Category 1: Industries in direct control of Central government, Manufacturing of arms and
ammunitions, Atomic energy, Railways

Category 2: Coal, Iron and Steel, Aircraft manufacturing, Ship building, manufacturing
telephones, telegraphs and wireless apparatus excluding radio, Mineral oils, New industries could
be taken up by the states

Category 3: Salt, Automobiles, tractors, Prime movers, Electric engineering, Heavy machinery,
Machine tools, Heavy chemicals, Fertilizers, Electrochemical industries, Non-ferrous metals,
Rubber, Power and industrial alcohol, cotton and woolen textiles, Cement, sugar, paper and news
print, air and sea transport, minerals and industries related to defense.

Category 4: Remainder of the above list was included in fourth category.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
2. Industrial Policy Resolution (1956):
Main objectives of the policy were:
1. Accelerate the growth rate of development of industries in India.
2. Develop Heavy Industries.
3. Expand the public sector.
4. Reduce the income and wealth disparities.
5. Establish a large co-operative sector.
6. Prevent monopolies.
 The policy focused on the development of heavy industries in the country.
 The policy classified the industries as follows:
1. Monopoly of the State (Included 17 Industries)
2. Mixed Sector for public and private enterprises (Included 12 Industries)
3. Industries left for private sector

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
Monopolies and Restrictive Practices Act (1970):
 Aimed to reduce the private economic power.
 Restrict business practices which are against the public interest.
 Offset monopoly effects.
 Strengthened in 1984
Industrial Policy Statement (1973):
 Made licensing stringent.
 Helped in establishing Secretariat of Industrial Approval (SAI).
 Also introduced the concept of Joint Sector in India.
Industrial Policy Statement (1977):
 Emphasized on small-scale and cottage industries.
 Established District Industries Centres (DICs).

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
NEW INDUSTRIAL POLICY (1991)
The New Industrial Policy was announced on July 24, 1991.
 It had the following objectives:
1. De-reserving disinvestment from the public sector industries:
 The public sector industries were undergoing huge amounts of losses. As a result, the
government de- reserved the industries for public sector to the extent of 8 industries.
 At present, there are only 3 industries namely, Atomic Energy, Railways and Specified
Minerals, which are reserved for public sector. Rest are open to the private sector.
2. De-licensing:
 The economy abolished the stringent licensing measures on all the industries except
Hazardous chemicals, alcohol, cigarettes, industrial explosives, defense products and drugs
and pharmaceuticals.
3. Liberalization of Foreign Investments:
 Gates were open for foreign enterprises and individuals to invest in the industrial sector of the
economy.
To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
4. Liberalization of Foreign Technology:
 The enterprises were free to use foreign technologies and hire technicians of foreign nationals
to help improve the productivity of the industrial units.
5. Removal of Mandatory Conversion Clause:
 The clause by the banks and other financial institutions, to convert loans into equities was
abolished.
6. Abolition of Phased manufacturing programme in electronic and engineering industries.
7. Liberalization of Industrial Location:
 The government abolished the concept of obtaining approval for setting up of industries in a
particular location. However, the polluting industries were required to be located outside the
periphery of cities with population more than one million to the extent of 25 kms.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
Some Important Theories and Models
AK model
 The AK model of economic growth is an endogenous growth model used in the theory of
economic growth , a subfield of modern macroeconomics .
 In the 1980s it became progressively clearer that the standard neoclassical exogenous growth
models were theoretically unsatisfactory as tools to explore long run growth,
 The key property of AK endogenous growth model is the absence of diminishing returns to
capital. The AK model uses a linear model where output is a linear function of capital.
Endogenous growth theory
 The endogenous growth theory primarily holds that the long run growth rate of an economy
depends on policy measures.
 For example, subsidies for research and development or education.
 Endogenous growth theory holds that economic growth is primarily the result of endogenous
and not external forces. S

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 Endogenous growth theory holds that investment inhuman capital, innovation, and
knowledge are significant contributors to economic growth.
 The theory also focuses on positive externalities and spillover effects of a knowledge-based
economy which will lead to economic development.
 The simplest version of endogenous model is AK models which assume constant exogenous
saving rate and fixed level of technology.
 The stickiest assumption of this model is that production function does not include
diminishing returns to capital. This means that with this strong assumption the model can
lead to endogenous growth.
Capability approach
 The core focus of the capability approach is on what individuals are able to do (i.e., capable
of).
 The capability approach is an economic theory conceived in the 1980s as an alternative
approach to welfare economics. In this approach, Amartya Sen and M. Nussbaumbring
together a range of ideas that were previously excluded from traditional approaches to the
economics of welfare.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
Measurement of capabilities
1. Human development index
2. Gender-related development index
3. Gender empowerment measure
4. Gender inequality index
HAGEN ‘s Theory of Social Change
 In Hagen’s theory of social change, he propounded how a traditional society becomes one in
which continuing technical progress takes place.
 The theory explores the following features which presumes the entrepreneur’s creativity as
the key element of social transformation and economic growth.
i. Product of social change and political change; According to Hagen , most of the
economic theories of underdevelopment are inadequate.
ii. Rejection of followers Syndrome; Hagen rejected the idea that the solution to
economic development lies in imitating western technology So the followers syndrome
on the part of the entrepreneur is discouraged.
To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
iii. Historical shift as a factor of initiating change;
 Hagen in his book ”How Economic Growth Begins” depicts historical shift as the crucial force
which has brought about social change,
 Technological progress thereby leading to the emergence of entrepreneurial class for
different castes and communities.
 Traditional agricultural societies have begun to rapidly progress technologically, which in turn
impacts both economic growth and social change.
Ramsey rule
 Argument that if prices are to be increased, it is a good strategy to increase the mark upon
goods with the most inelastic demand, because consumers or users will buy them anyway.
Markup Percentage = Gross Profit Margin/Unit Cost = $25/$100 = 25%
 This rule is applicable also in taxation where some goods and services are to be taxed, but not
where all are to be taxed. Proposed by Frank Ramsey, it is also called inverse elasticity rule.
 The more elastic demand for the product, the smaller the price markup. Frank P. Ramsey
found such a result in 1927 in the context of taxation.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 In the Ramsey–Boiteux pricing, the markup of each commodity is also inversely proportional
to the elasticities of demand.
 Hence the Ramsey–Boiteux pricing consists into maximizing the total welfare under the
condition of non-negative profit, that is, zero profit.
Verdoorn's law
 Verdoorn's law is named after Dutch economist, Petrus Johannes Verdoorn(1949).
 The Verdoorn’s Law states that in the long run productivity generally grows proportionally to
the square root of output.
 In economics, this law pertains to the relationship between the growth of output and the
growth of productivity.
 According to the law, faster growth in output increases productivity due to increasing returns.
 Verdoorn argued that “in the long run a change in the volume of production, say about 10
per cent, tends to be associated with an average increase in labor productivity of 4.5 per
cent.”

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 The Verdoorn’s Law describes a simple long-run relation between productivity and output
growth, whose coefficients were empirically estimated in 1949 by the Dutch economist.

Turnpike theory
 Turnpike theorem was developed by John von Neumann in 1945,Lionel W. McKenzie traces
the term to Robert Dorfman, Paul Samuelson, and Robert Solow's Linear Programming and
Economics Analysis in 1958.
 Turnpike -referring to an American English word for a Highway:
 Turnpike theory refers to a set of economic theories about the optimal path of accumulation
(often capital accumulation) in a system, depending on the initial and final levels.
 The name of the theory refers to the idea that a turn pike is the fastest route between two
points which are far apart, even if it is not the most direct route.
 It is exactly like a turnpike paralleled by a network of minor roads.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 There is a fastest route between any two points; and if the origin and destination are close
together and far from the turnpike, the best route may not touch the turnpike.
 But if the origin and destination are far enough apart, it will always pay to get on to the
turnpike and cover distance at the best rate of travel, even if this means adding a little
mileage at either end.
 The best intermediate capital configuration is one which will grow most rapidly, even if it is
not the desired one, it is temporarily optimal.

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
 QUESTIONS FOR THE DAY

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
1. Consider the following statements and identify the right ones.

i. The Industrial Policy of 1948 was the first industrial policy statement by the Government
ii. It gave leading role to the private sector

a. I only
b. ii only
c. both
d. none

2. Which of the following was not an objective of the 1956 industrial policy?

a. Development of cooperative sector

b. Expansion of public sector
c. Develop heavy and machine making industries
d. None of the above

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
3. Consider the following statements and identify the right ones.

i. The 1980 industrial policy emphasized "economic federalism"

ii. Liberal license policies were advocated for agro-based industries

a. I only b. ii only
c. both d. none

4. Consider the following statements and identify the right ones.

i. The 1991 industrial reforms exempted all industries from compulsory licensing
ii. There are six industries under compulsory licensing today

a. I only
b. ii only
c. both
d. none

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731
8. Consider the following statements and identify the right ones.

i. The Board for Reconstruction of Public Sector Enterprises is an advisory body for strengthening
public sector units
ii. It comprises of a chairman, 3 official and 3 non official members and 3 permanent invitees.

a. i only b. ii only
c. both d. none

Answers:-
1) A 2) D 3) C 4) B 5) C

To join Diksha NET JRF Paper 2- Economics Preparation, Send “JOIN” to 7306721731