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Note Chapter3 Essay

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3.2 Linear-stages theories
Series of successive stages of economic growth through which all countries have to pass. The right mixture of savings, investment and foreign aid were all that was necessary to enable developing nations to proceed along an economic growth. Central role – acceleration of the capital

Rostow’s stages of growth
Stages-of-growth model of development – a theory of economic development according to which a country passes through sequential stages in achieving development. 5 stages:
the traditional society
the precondition to take off into self sustaining growth
the take off
strategies necessary for the take off: mobilization of domestic and foreign savings in order to generate sufficient investment to accelerate economic growth. the drive to maturity
age of mass consumption
Harrod-Domar growth model (AK) – a functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net saving rate (s) and inversely on the national capital-output (c). The rate of growth is determined jointly by the net national saving ratio (s) and the national capital-output ratio (c). The growth rate of national income is positively related to savings ratio (the more the economy is able to save – and invest – out of a given GDP, the greater the growth of that GDP will be) and negatively related to the economy’s capital-output ratio (the higher c is, the lower the rate of GDP growth will be). The model suggests that if developing countries want to achieve and economic growth, governments need to encourage saving and support technological advancements (+labor force growth) to decrease the economy’s output ratio. If capital output ration decreases the economy will be more productive (more output from less input). Capital output ratio = a ration that shows the units of capital required to produce a unit of output over a given period of time. If we assume that there is some direct economic relationship between the size of total capital stock (K) and total GDP (Y), -$3 of capital is always necessary to produce an annual $1 stream of GDP – it follows that any net additions to the capital stock in the form of new investment will bring about corresponding increase in the flow of national output, GDP. Capital stock (K) = the total amount of physical goods existing at a particular time that have been produced for use in the production of other goods and services. K = total capital stock

Y = GDP, national output
S = net savings
c= capital output ratio
s= net national savings ratio
Countries that were able to save 15% to 20% of GDP could grow at much faster rate than those who saved less. Poor countries save at very low levels. If country wants to grow at 7% it must save 21% (cannot save that much, thus, savings gap should be filled through foreign aid or private investment). Savings is not sufficient. Marshall Plan worked because European countries possessed necessary structural, Institutional, attitudinal conditions to convert new capital effectively into higher levels of output. Appendix 3.1

3 components of economic growth:
Capital accumulation – increasing a country’s stock of real capital. To increase the production of capital goods necessitates a reduction in the production of consumer goods. When some proportion of present income is saved and invested in order to augment future output income (new factories, machinery, equipment increases the capital stock of a nation and make it possible f...

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