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IGNOU MEC 004 Solved Assignment 2022-23
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Submission Date :
- 31st March 2033 (if enrolled in the July 2033 Session)
- 30th Sept, 2033 (if enrolled in the January 2033 session).
SECTION – A
1. Critically examine the basic formulations of the Harrod-Domar model of economic growth. How does the Harrod model explain the occurrence of trade cycles?
Ans. The Harrod–Domar model is a Keynesian model of economic growth. It is used in development economics to explain an economy’s growth rate in terms of the level of saving and of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939, and Evsey Domar in 1946, although a similar model had been proposed by Gustav Cassel in 1924. The Harrod–Domar model was the precursor to the exogenous growth model.
Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution—and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.
According to the Harrod–Domar model there are three kinds of growth: warranted growth, actual growth and natural rate of growth.
Warranted growth rate is the rate of growth at which the economy does not expand indefinitely or go into recession. Actual growth is the real rate increase in a country’s GDP per year. (See also: Gross domestic pRroduct and Natural gross domestic product). Natural growth is the growth an economy requires to maintain full employment. For example, If the labor force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent.
Although the Harrod–Domar model was initially created to help analyse the business cycle, it was later adapted to explain economic growth. Its implications were that growth depends on the quantity of labour and capital; more investment leads to capital accumulation, which generates economic growth. The model carries implications for less economically developed countries, where labour is in plentiful supply in these countries but physical capital is not, slowing down economic progress. LDCs do not have sufficiently high incomes to enable sufficient rates of saving; therefore, accumulation of physical-capital stock through investment is low.
The model implies that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through technological advances.
The model concludes that an economy does not “naturally” find full employment and stable growth rates.
The main criticism of the model is the level of assumption, one being that there is no reason for growth to be sufficient to maintain full employment; this is based on the belief that the relative price of labour and capital is fixed, and that they are used in equal proportions. The model also assumes that savings rates are constant, which may not be true, and assumes that the marginal returns to capital are constant. Furthermore, the model has been criticized for the assumption that productive capacity is proportional to capital stock, which Domar later stated was not a realistic assumption.
It is determined by the saving ratio indicated by s and the incremental capital-output ratio indicated by C. The second concept is the warranted rate of growth indicated by Gw. The warranted rate of growth is taken to be the rate of growth required for the full utilisation of a growing stock of capital.
If warranted rate of growth occurs, it “will leave all parties satisfied that they have produced neither more nor less than the right amount.” A third concept is the natural rate of growth indicated by Gn.
Harrod defines it as the rate of growth that is determined by the current growth of the working population and the current potential for technical progress. Such a rate of growth is not determined by the wishes of people as regards saving.
2. Discuss the concept of Golden Age Equilibrium in Joan Robinson’s model. What are its main criticisms?
Ans. Joan Robinson’s growth model clearly incorporates the problem of population growth in a developing economy and analyses the effects of population on the rate of capital accumulation and growth of output.
Mrs. Joan Robinson’s model of economic growth is based on two basic conditions, i.e:
(i) Capital formation depends upon the manner of distribution of income, and
(ii) The rate at which the labour is used depends upon the supply of capital and that of labour. Her model is given in her book ‘The Accumulation of Capital’ based on the capitalist rules of the game.
She makes the following assumptions:
(a) Total income in real terms is divided between two classes—workers and entrepreneurs.
(b) Workers spend all their wages on consumption and save nothing.
(c) Profit seekers save and invest all their profits and consume nothing. If they have no profits, they cannot accumulate and if they don’t accumulate, they have no profits.
(d) That capital and labour are combined in fixed proportions to produce a given output (this assumption was dropped later on) i.e., there is no technological change. In other words, there is a given technique of production within fixed proportion of capital to labour.
(e) Her entire argument runs in ex-post terms. There is no change in the price level.
(f) There is a laissez-faire closed economy.
(g) There is no shortage of labour, the entrepreneur can find as much labour as they wish to enlarge the path of steady growth which in the Robinson framework is seen as a constant rate of capital accumulation, necessitates a rate of profit that leads businessmen to perpetuate the past rate of accumulation such a profit rate needs, for example, the condition that there be no surplus or scarcity of labour, that is, the labour force should grow at the same rate as capital.
Features:
Mrs. Robinson’s model is a dynamic two sector model in which she examines what happens in the quasi-long period. Her main thesis is that of the two classes in the basic model, workers consume everything they get; while businessmen reinvest whole of their profits, as a result a fundamental identity follows ; ex-post investment equals ex-post profits. However, there is a limit to entrepreneurs attempt to invest all their profits—this limit is set by the minimum level of real wages on which the workers insist.
Within that limit—inflation barrier—there are other barriers set by financial monetary factors, productive capacity, balance of payments, etc. At each step of the growth of the economy, these barriers are pushed up higher and higher and within these constraints growth depends upon the energy of the entrepreneurs.
The process of growth is eased and barriers are overcome if there is smooth flow of innovations. The ultimate stage is the ‘Golden Age’ and the potential growth ratio of the Golden Age economy is akin to Harrod’s natural rate of growth Gn. Thus, she is interested in explaining the fundamental nature of economic growth according to the ‘capitalist rules of the game’? For this purpose she builds a verbal model and K.K. Kurihara built up a real model, which is given hereafter.
Thus, the rate of growth of capital given by equation (vi) is the rate which is attainable by entrepreneurs by following the capitalist rules of the game, according to J. Robinson. This equation shows that the rate of growth of capital is capable of increasing, if the net return of capital (P-w/P) rise in greater proportion than the capital-labour ratio. In Ricardian terms it means that capital accumulation is strengthened by a fall in the real wage rate. It appears that she has brought us back to Ricardo’s theory of economic development, though via Keynesian door.
Coming to Mrs. Robinson’s notion of ‘Golden Age’ i.e., equilibrium with full employment of labour and full utilization of capital. This is possible, if we assume (K/N) = θ = constant in conditions of full employment and full utilization; an increase in the amount of fully employed labour is given by ∆N = ∆K/θ ( K/N = θ).
From this relation we can have the rate of growth of fully employed labour:
which shows that fully employed labour grows at the same rate as the rate of growth of capital, and which implies that capital must grow as fast as labour population, when capital-labour ratio (θ) remains constant. In other words, it shows that the rate of change in labour force (∆N/N) is equal to the rate of change in capital stock (∆K/K). Thus, given the perfect supply of labour, with respect to output, this equation signifies a golden age equilibrium with full employment of both labour and capital.
Where Y is the net national income, N the amount of labour employed, K the amount of capital equipment utilized, p the average price of output as well as of capital equipment, w the money wage rate, and n the gross profits rate (including the interest rate) required for the normal utilization of the existing stock of real capital. Divide both sides of equation (i) above by p (the average price), we get the distribution equation in real terms:
Y = W/P N+ πK ,..(viii)
SECTION – B
3. Distinguish between economic growth and development. Briefly mention the main benefits that economic growth confers upon society.
4. Explain the concept and implications of globalisation. Also discuss its advantages and shortcomings.
5. Critically evaluate the theory of critical minimum effort. Also bring out its limitations.
6. Explain the meaning of planning as an instrument of resource allocation. Why is there a need for planning in the development process?
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IGNOU MEC 004 Solved Assignment 2022-23
7. Compare and contrast the Uzawa two-sector growth model with the Feldman model.
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