Theories of Planning & Planning Models

Economic Growth

Measuring economic growth Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP).

 Classical economics - the first modern school of economic thought. Major developers include Adam Smith, JeanBaptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill.

Various theories on economic growth

Classical growth theory "the wealth of nations". Whereas they stressed the importance of agriculture, Smith Manufacturing was central to the entire economy David Ricardo argued that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. "comparative advantage FREE TRADE

Classical Model
The foundation for the Classical Model is three basic ideas: 1. Output is produced by capital and labor, 2. Capital is fixed in the short run, and 3. Supply and demand for labor determine the amount of labor hired. Implies no unemployment.

Two versions of the Classical Model. Both explore the properties of an economy where unemployment is assumed not to be an important economic issue. A Simple Classical Model Formulated in the spirit of the Simple Keynesian Model . The simplification is an assumption that labor supply is fixed rather than a function of the wage rate.

The Classical Model The supply of labor is an upward sloping, Not vertical function of the real wage rate. Aggregate supply and demand diagram and

The classical economists did not totally disregard the role of aggregate demand.

The Production Function and the Demand for Labor In the classical production function, output Y is taken to be a function of capital K and labor N Y = f(K,N).

Demand for Labor Marginal product of labor is dY/dN = MPN, Decreasing function of Y. MPN = W/P. The MPN curve thus is the demand for labor. The Supply of Labor The supply of labor is an increasing function of the real wage rate.

Aggregate Supply and Demand Equilibrium in aggregate supply and aggregate demand determines the price level P. Aggregate Demand The classical aggregate demand is based on M = k P Y, where k is a constant because the velocity of money.

SUMMARY
If market forces demand & supply allowed to play freely in the market ; Always Full employment in long run. No over production / under production. Economy always in equilibrium in long run.

SCHUMPETER THEORY Joseph Schumpeter's main concern -economic development,

closely associated with innovation.

Innovative entry by entrepreneurs --force that sustained long-term economic growth, Destroyed the value of established companies that enjoyed some degree of monopoly power.

Barriers to entry-- monopolies enjoyed, new entrants -radically different: Fundamental improvement was achieved, not a mere difference of packaging.
The threat of market entry would keep monopolists and oligopolists' disciplined and competitive, --innovative quality . focusing on the unexpected, rapid spurts of entrepreneur-driven growth.

Developed a model in 2 stages: First Approximationinitial impact of innovatory ideas. Second Approximationeffects created by the application of innovations.

First Approximation
Starts with economic system in equilibrium. No incentive for additional investment. Equilibriumnew technique /process financed through bank credit. No surplus Equilibrium. Additional funds banking system---bid high price for inputs Price rises.

 Firm imitate innovationaccelerates price rise. Output flows into marketPhase of expansion.

Beyond certain limitincreased output decreased price. Further innovations needs time ,so repayment--contraction in money supply. Price falls further---Recession begins continues until equilibrium.

Second Approximation
Analyses secondary waves created by 1st. Main element Speculation. When primary wave of expansion begins. Existing firms borrow heavily. When prices falls indebtedness ,problem. Causes depression. Recovery possible,when? Liquidation of assets built on borrowed funds. Inefficient firms eliminated.

Drawbacks
Innovation one of the factors causing fluctuations.-not sole factor. Sociological based arguments-rather than economic factors.

Rostows Growth Theory

Table of Contents Walt Rostow's model. 5 Stages to Economic Development Stage 1: Traditional Society Stage 2: Establishing the Preconditions for Takeoff Stage 3: Economic Takeoff Stage 4: The Drive to Maturity Stage 5: High Mass Consumption Positive and Negative Impacts of Rostow's Model

 Stages of Economic Development The stages of economic development ,best-known model for economic growth- proposed by Walt Rostow (1960's). A country goes through five stages as the country's economy develops. Rostow's model presents only one explanation for variations in the economic development and quality of life of different countries. Europe and North America.

Rostows Growth Theory

 "The Stages of Economic Growth", (1950). Controversial, Rostows theory has lasted decades . Helps to make an impact on how countries are classified. "The Stages of Economic Growth" outlines five stages that a country goes through in order to develop its economy. Below are those five stages.

5 Stages to Economic Development

Stage 1: Traditional Society - Countries in this stage have an economy dominated by subsistence agriculture. - Due to the domination of agriculture, they have severely limited potential for both economic and population growth. - Both social and economic progresses are limited by natural controls such as droughts and outbreaks of disease. - Government structures are often feature are inflexible because they are used to operating in conditions that change very little over centuries.

Stage 3: Economic Takeoff - A country has reached this stage when their economy starts to change dramatically in response to the introduction of important technological innovations. - The agriculture changes from primarily subsistence to primarily commercial and manufacturing becomes a more important part of the economy. The tertiary sector of the economy expands in response to the growth of cities and the number of paid workers who become customers for service providers. .

Stage 4: The Drive to Maturity - When a country reaches this stage it is when there is an extended period of sustained growth. Economic gain outpaces population growth, so per capita wealth increases. The economy becomes more diversified with a continued expansion of manufacturing and a variety of services. - Here is when the modern, efficient production methods came into use and by now an increasing percentage of the nations wealth is invested in developing the economy.

Stage 5: High Mass Consumption - In this stage, many people have incomes that are greater than necessary for buying essentials such as shelter, food, and clothing. - As a result, there is a growing demand for additional consumer goods and services. Also the society is wealthy enough to invest in social programs such as improved health care systems and educational opportunities.

Positive and Negative Impacts of Rostow's Model

Rostow's model provdes mile stones ,to be achieved in order for development and growth to happen in an economy. Issues Firstly, this model is reflected towards European and North American economies which provides a bias opinion. A model that is more relevant to just important, wealthy or prominent areas only. Secondly, this model creates limitations to growth and development. It does not outline specifics, but rather highlights the key of investment , growth to

Positive and Negative Impacts of Rostow's Model

Lastly, within his model, there is not much room to steer away from the specific stages. Rostow implies that an economy must go through stage 2 before stage 3, which may not be the case. Also, an economy might only develop in one aspect rather than all, which could cause it to experience more growth in one area, but still be hindered and limited in another. In conclusion, Rostows model relies on specific conditions for economic growth and development rather than focusing on a broad range of areas that need to be developed as a whole.