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Summary
Economics_RS Class 11

FACTORS THAT WILL DETERMINE THE TYPE OF GROWTH MODEL TO BE FOLLOWED (05:04 PM)

  • Strength of the manufacturing sector.
  • Demographics of the country.
  • The openness of the economy.
  • Trade balance & economic strength of the country.

REASONS FOR INDIA'S SHIFT TO INVESTMENT-LED GROWTH (05:12 PM)

  • Aim of emerging as an industrialized country to handle Industrialisation 4.0 (AI, robotics).
  • To attract more foreign investment in the form of FDI & FII.
  • Need for fiscal & social infrastructure development.
  • Reaping the benefits of demography-Huge demographic dividend.

REASONS FOR CHINESE SHIFT TO CONSUMPTION-LED GROWTH (05:22 PM)

  • Sub-prime crisis and its impact on the external trade of the country.
  • Increase in labor cost in China.
  • Protectionist policies and move towards deglobalization.
  • Change in consumer attitude and technology.

FEASIBILITY OF INVESTMENT-LED GROWTH (05:40 PM)

  • Challenges of twin balance syndrome.
  • Infrastructure is a prerequisite for an investment-led growth model.
  • Currently, the government has to focus on infrastructure development along with ensuring inclusive growth.
  • A high rate of inflation will reduce the propensity to save, thereby affecting investment.
  • Protectionist policies followed by other countries will affect India's exports.
  • High Capital Output Ratios will make investments inefficient.
  • Capital Output Ratio-
  • It is the amount of capital required to produce a single unit of output.
  • The higher the Capital Output Ratio, the lower the efficiency.
  • Developing countries have higher Capital Output ratios in comparison to the developed world.
  • The savings to investment gap will increase during the pandemic situation.
  • An increase in the debt burden of the government will crowd out private investment.

HARROD- DOMAR MODEL (06:11 PM)

  • It is a model of economic growth in development economics.
  • It was developed by Harrod in 1939 and Domar in 1946.
  • The model focussed on understanding economic instability by analyzing the dynamic nature of capital or investment.
  • Major economic determinants like natural resources, population, and technological growth constantly influence two important factors-
  • (i). Rate of investment || (ii). Capital Output Ratio

  • Economic Growth= Savings X 1/COR

    Economics Growth = Investment X 1/COR
  • The model was adopted by developed countries to prevent chronic unemployment.
  • The model focuses on accurate COR and a high propensity to save which is generally absent in developing countries.
  • The model believes in a virtuous cycle of increased savings transforming into increased investments.
  • This result in higher capital stock leading to economic growth.
  • Limitations of Harrod-Domer Model- (06:30 PM)
  • It is difficult to increase the savings ratio in low-income countries.
  • A strong financial system is lacking in many emerging countries.
  • Therefore, increased family savings will not be channelized through the banking system.
  • R&D required to reduce COR is generally underfunded.
  • A rise in capital spending is not always a pre-condition for economic growth and development.
  • Assuming a constant COR is difficult in developing nations.

LEWIS MODEL (06:40 PM)

  • In 1954, Sir Arthur Lewis published a paper titled "Economic Development with unlimited supplies of Labour".
  • This model mainly postulates two sectors-
  • (i). Subsistence || (ii). Modern
  • This can also be termed as agriculture and industry.
  • Although, Lewis meant a broader class of subsistence which included agricultural labor, urban poor, domestic servants, etc
  • Generally, the rural subsistence sector is characterized by Zero Marginal Labour Productivity.
  • This means surplus labor can be withdrawn from the agricultural sector without any loss of output.
  • This surplus when shifted to the industrial sector will improve productivity.
  • There is continuous labor migration from the traditional to the modern sector.
  • Wages remain constant and low for a longer period of time.
  • Economic growth occurs as a rising share of profits gets re-invested.
  • In the Lewis model, eventually, the reservoir of cheap labor gets exhausted, capital accumulation slows down & wages get determined by marginal productivity.
  • Criticism-
  • The profits of the industrialist may not be re-invested into the industry.
  • Industrialists may replace labor with capital-intensive technology.
  • Labor wages may not be constant and low for a longer period of time.

PLANNING (07:28 PM)

  • Incremental Capital Output Ratio (ICOR)= Change in Capital to GDP/Change in Output to GDP
  • It is defined as additional capital that is required to produce one additional unit of Output.
  • During the 2nd Five Year Plan, Mahalanobis focussed on Industrialisation with a primary focus on heavy industries.
  • This model is an investment allocation model.
  • Mahalanobis's Two-Sector Theory focuses on Consumer Goods & Capital Goods.
  • If a country focuses on Capital goods and basic industries, there will be exponential growth in the long term.
  • Why Planning? (07:48 PM)
  • Optimum utilization of resources
  • Challenges to be addressed through Planning-
  • Unemployment
  • Economic Growth
  • Achieving Self-reliance
  • Handling inequalities
  • 1st Five-Year Plan-
  • It was based on the Harrod Domar model.
  • The growth targets were well achieved during the plan tenure.
  • The most important focus was on agriculture, irrigation, and rural development.

TOPICS TO BE DISCUSSED IN THE NEXT CLASS- 5 YEAR PLANS IN INDIA (PLANNING)