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Development Economics
y1 − y 0
Growth = × 100
y0
Where,
y1 = Gross National Product of the current year
y0 = Gross National Product of the previous year
Growth vs. Development
Limitations:
In this model, savings ratio and capital
formulation ratio are assumed to be constant. But
they fluctuate a lot.
The theory is based on ‘Laissez Faire’ economy,
where there will be no Govt. interference. But in
Roy F. Harrod
practical, pure Laissez Faire doesn’t exist at all.
(1900-1978)
And, the last one, it is not applicable in the
developing countries like Bangladesh, India, Sri
Lanka and Pakistan.
Neo-Classical Model
Limitations:
It doesn’t provide any new theory of
development. It just solves the problem of
Harrod-Domar model.
This theory emphasizes over
technological advancement, but it
couldn’t show the exact determinants of
the technological progress. Robert Solow
This theory is based on diminishing
marginal return, which only can ensure a
steady rate for the short term, not a long-
run growth in the economy.
Evolution of Endogenous Theory
The model defines that output and growth depend on the internal
variable saving rate. It is the saving rate that is converted into
human capital investment (investment for innovating new ideas and
methods).
It also holds that technological progress is essential for economy’s
long-run growth. But the determinant of the technological progress is
the saving rate.
Assumptions
Horizontal Innovation
Vertical Innovation
Algebraic Expression & Graphical Representation
Y = aK...........(1)
∆K = sY ..........(2)
∆K = saK ............(3)
∆K / K = sa
∆Y / Y = sa
Ending Point
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