Theories of Planning & Planning Models

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Theories of Planning & Planning

Models


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Economic Growth

Measuring economic growth Economic growth is measured as a percentage

change in the Gross Domestic Product (GDP)

or Gross National Product (GNP).
http://en.wikipedia.org/wiki/Gross_Domestic_Producthttp://en.wikipedia.org/wiki/Gross_National_Producthttp://en.wikipedia.org/wiki/Gross_National_Producthttp://en.wikipedia.org/wiki/Gross_Domestic_Product


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Classical economics - the first modern school

ofeconomic thought.

Major developers include Adam Smith, Jean-

Baptiste Say, David Ricardo, Thomas Malthus

and John Stuart Mill.
http://en.wikipedia.org/wiki/History_of_economic_thoughthttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/John_Stuart_Millhttp://en.wikipedia.org/wiki/Thomas_Malthushttp://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Jean-Baptiste_Sayhttp://en.wikipedia.org/wiki/Adam_Smithhttp://en.wikipedia.org/wiki/History_of_economic_thought


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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 wasmore profitable work to be done here.

"comparative advantage FREE TRADE
http://en.wikipedia.org/wiki/David_Ricardohttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/Comparative_advantagehttp://en.wikipedia.org/wiki/David_Ricardo


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Classical Model

The foundation for the Classical Model is threebasic 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.


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Two versions of the Classical Model.

Both explore the properties of an economy whereunemployment is assumed not to be an importanteconomic issue.

A Simple Classical Model

Formulated in the spirit of the Simple Keynesian Model .

The simplification is an assumption that labor supply isfixed rather than a function of the wage rate.
http://www.econmacro.com/keynesian/simple_keynesian_model.htmhttp://www.econmacro.com/keynesian/simple_keynesian_model.htm


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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 disregardthe role of aggregate demand.


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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).
http://www.econmacro.com/foundations/markets/production/index.htmhttp://www.econmacro.com/foundations/markets/production/index.htm


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Demand for Labor

Marginal product of labor is dY/dN = MPN,Decreasing function ofY.

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.
http://www.econmacro.com/foundations/markets/labor/labor_supply.htmhttp://www.econmacro.com/foundations/markets/labor/labor_supply.htm


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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.
http://www.econmacro.com/foundations/markets/aggregate_output/aggregate_demand.htmhttp://www.econmacro.com/foundations/markets/aggregate_output/aggregate_demand.htm


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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.


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

closely associated with innovation.

Innovative entry by entrepreneurs --force that sustained long-termeconomic growth,

Destroyed the value of established companies that enjoyed somedegree ofmonopoly power.

Barriers to entry-- monopolies enjoyed, new entrants -radicallydifferent:

Fundamental improvement was achieved, not a mere difference ofpackaging.

The threat of market entry would keep monopolists andoligopolists' disciplined and competitive, --innovative quality .

focusing on the unexpected, rapid spurts of entrepreneur-driven

growth.
http://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Entrepreneurshttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Entrepreneurs


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Developed a model in 2 stages:

First Approximationinitial impact ofinnovatory ideas.

Second Approximationeffects created by theapplication of innovations.


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First Approximation

Starts with economic system in equilibrium.

No incentive for additional investment.

Equilibriumnew technique /processfinanced through bank credit.

No surplus Equilibrium.

Additional fundsbanking system---bid highprice for inputs

Price rises.


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Firm imitate innovationaccelerates price rise.

Output flows into marketPhase of expansion.

Beyond certain limitincreased outputdecreased price.

Further innovations needs time ,so repayment---

contraction in money supply. Price falls further---Recession begins continues

until equilibrium.


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Second Approximation

Analyses secondary waves created by 1st.

Main elementSpeculation.

When primary wave of expansion begins.

Existing firms borrow heavily.

When prices fallsindebtedness ,problem.

Causes depression.

Recovery possible,when?

Liquidation of assets built on borrowed funds.

Inefficient firms eliminated.


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Drawbacks

Innovationone of the factors causing

fluctuations.-not sole factor.

Sociological based arguments-rather than

economic factors.


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Rostows Growth Theory Stages of Economic Development

The stages of economicdevelopment ,best-known model foreconomic growth- proposed by WaltRostow (1960's).

A country goes through five stagesas the country's economy develops.

Rostow's model presents only one

explanation for variations in theeconomic development and qualityof life of different countries.

Europe and North America.


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"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.


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5 St t E i D l t


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5 Stages to Economic Development

Stage 1: Traditional Society

- Countries in this stage have an economydominated by subsistence agriculture.

- Due to the domination of agriculture, they haveseverely limited potential for both economic and

population growth.

- Both social and economic progresses are limitedby natural controls such as droughts and outbreaks

of disease. - Government structures are often feature are

inflexible because they are used to operating inconditions that change very little over centuries.


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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 thegrowth of cities and the number of paid workers who

become customers for service providers.

.


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Stage 4: The Drive to Maturity

- When a country reaches this stage it is when thereis an extended period of sustained growth.

Economic gain outpaces population growth, so per

capita wealth increases. The economy becomesmore diversified with a continued expansion of

manufacturing and a variety of services.

- Here is when the modern, efficient productionmethods came into use and by now an increasing

percentage of the nations wealth is invested in

developing the economy.


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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 foradditional consumer goods and services. Also the

society is wealthy enough to invest in social

programs such as improved health care systems andeducational opportunities.

Positive and Negative Impacts


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Positive and Negative Impacts

of Rostow's ModelRostow's model provdes mile stones ,to be

achieved in order for development and growthto 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


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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 couldcause it to experience more growth in one area, but still be

hindered and limited in another.

In conclusion, Rostows model relies on specific conditionsfor economic growth and development rather than focusing

on a broad range of areas that need to be developed as a

whole.

Positive and Negative Impacts of Rostow s Model

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Theories of Planning & Planning Models