Neo classical Theories of

development

Growth and development.Topic- 2

Solo model, endogenous model ,Joan Robinson

model.

4.Theories of economic growthNeo-classical

4.Mead

model

2.Endogenous

growth model

1.Sollow

model

3.Joan

Robinson

model

1.Solow model of growth

Solow expended H-D model of growth.

Third variable technology is exogenously given.

This model is also called as exogenous growth model.

Only one single commodity is produced.

When labour and capital separately used – diminishing

return to scale.

When L & K jointly used then – constant return to scale.

In solow model , price and wage are flexible.

In full employment technical progress is neutral .

Labour and capital are perfectly substitute.

The labour supply curve is vertical line.

Possible growth pattern/fundamental equation is-

R’= sf(r,1)-nr

Variable capital output ratio.

Saving is constant function of income.

Acc. To Solow growth rate does not depend upon saving.

2.Rate of technical progress that is independent of saving.

Output is based on two exogenous variables.

1.Rate of population growth.

Production take place according to linear homogenous

production function of first degree.

Technical progress doesn't influence the productivity

and efficiency of labour.

2.Endogeneous growth model

It means investment in human capital, innovation, and

knowledge are significant contributors to economic

growth.

Knowledge and techniques are non-rival goods.

Increasing return to scale – when labour and capital

use together.

Constant return to scale – when L&K use separately.

Endogeneous growth models

1.Arrow model – learning by doing..

He developed his theory in 1962.

According to him capital can be accumulated with the

knowledge and experiences.

Arrow model can be written as-

Yi= A(K) F (Ki,Li)

Yi-Output of firm i.

Ki- capital stock

A- technical factor.

2.Levhari and Sheshinski model

This model is extended Arrow model.

He developed his theory in 1962.

They assume that source of knowledge or learning by

doing is each firms Investment.

An increase in investment lead to increase in knowledge.

They assume that – the knowledge of a firm is a public

good which other firm can have at zero cost.

3.King-Robson model

He emphasized on learning by watching.

his study shows that -innovation in one sector of the

economy has the demonstration effect on the productivity

of other sectors.

4.The Romer model

He developed his endogenous theory in 1986 .

His theory is based on Arrow model.

Romer developed learning by investment.

Romer used three key elements

2.Increasing return to scale in production of output.

1.extranalities.

3.Diminishing return in the production of new knowledge.

Acc.to him the firm investing in research technology

will not beneficiary of the increase in knowledge.

He emphasized the role of human capital.

5.Lucas Model

Lucas used Uzawa model.

Acc. To him investment in education lead to the

production of human capital.

He discuss internal and external effect.

Internal effect of human capital – undergoing training

is more productive.

External effect – it increase productivity of capital.

3.Joan Robinson Model

She emphasized the role of capital accumulation.

Capital is consider as engine of grwoth.

This model is also known as –capital accumulation model

of growth.

Assumptions-

Only two factors of production- L&K.

Total income divided into labour(wages) and capital(profit).

Technology is neutral or fixed.

Profit varies inversely with capital labour ratio.

Equation- π= ΔK

K

Shows profit rate equal to growth rate of capital .- it is

called desired or warranted growth rate.

Golden Age condition-

In golden age she explain the role of labour in the growth

of economy.

ΔK

K

ΔL

L=

The equation of golden age depend upon profit-wage

relation.

Acc. To her labour is ultimate source of capital

accumulation.

Robinson model is more relevance in capital- poor

economy.

H-D model is more relevance in capital-rich economy.

•Platinum age- capital stock is not appropriate to the

desire rate of growth.

Mrs. Robinson combined two theories-

1. Classical theory of value and distribution.

2. Keynesian theory of saving and investment.

4.Meade model (steady growth model)

He construct growth model involve Y,K,L & T

His analysis only applicable where steady growth

possible.

Assumptions

Land and labour are only the factors that use in production.

Production is govern under constant return to scale.

Based on closed economy.

Growth rate of income depend upon 3 factors-

1.Productivity of capital.

2.Level of saving.

3.Level of technology.

Condition of steady growth.

1.Elasticity of substitution bw all factor are equal to

unity.(perfect substitute)

2.Technical progress should be neutral.

Profit save , wage save ,and rent save are constant.

This model explain steady growth condition in developing

countries like- India.

Harrod- domarModel

Growth and development.Topic- 3

Steady growth eqm, knife edge eqm,Razar edge

eqm

4.Theories of economic growth

1.Harrod growth

Model

2.Domor growth

model

classical

Steady growth eqm.

Razor edge effect.

Knife edge eqm