Transcript Classical Theory of development

Classical Theory of
development
Ms. Gurpreet Kaur
Dept. of Economics
PGGCG-11, Chd
Classical Economics:
Political
Economy
The pursuit of economic growth and development as a
socially desirable goal is contemporaneous with the rise of
capitalism as an economic system (and with the
emergence of the industrial revolution).
Two objectives of classical political economists inquiry are:
1. To explain the reasons for rapid economic expansion of
total economic wealth that accompanied industrialization
2. To explain the enigma of the extreme of wealth and poverty
that attended this process.
Who are the classical economists?
•
Adam Smith
•
Thomas Malthus
•
David Ricardo
•
John Stuart Mill
•
Karl Marx
THEORIES OF
ECONOMIC GROWTH
• Classical Growth Theory
• Classical growth theory
• The theory that the clash between
an exploding population and
limited resources will eventually
bring economic growth to an end.
• Malthusian theory
• Another name for classical growth
theory—named for Thomas Robert
Malthus.
The Basic Idea
• Advances in technology and the
accumulation of capital bring
increased productivity and
increased real GDP per person.
• Classical growth theory says that
the increase in real GDP per
person will be temporary because
prosperity will induce a population
explosion and the population
explosion will decrease real GDP
per person.
Classical Theory of Population Growth
• When the classical economists were
developing their ideas about
population growth, an unprecedented
population explosion was under way.
• To explain the high rate of population
growth, the classical economists
used the idea of a subsistence real
income (real GDP per person).
• In classical theory, when real income
exceeds the subsistence real
income, the population grows.
• The increasing population decreases
capital per hour of labor and eventually
decreases real income to less than
subsistence real income.
• If the actual real income is less than
the subsistence real income, some
people cannot survive and the
population decreases.
• No matter how much technological
change occurs, real income (real GDP
per person) is always pushed back
toward the subsistence level.
• This dismal implication led to
economics being called the dismal
science.
Figure shows classical
growth theory.
1. The economy starts at
point A on productivity
curve PC0 with real GDP
at the subsistence level
and the population
constant.
2. As capital per hour of
labor increases, real GDP
per person rises above the
subsistence level—the
economy moves to point
B.
3. As technological
advance (and human
capital accumulate)
increase productivity,the
productivity curve shifts
upward to PC1—the
economy moves to C.
4. With real GDP above
the subsistence level, the
population grows and
capital per hour of labor
decreases downward
along PC1.
5. At point D, the
economy is back at the
subsistence level of
real GDP per hour of
labor.
Process of Economic
Growth
According to Classical
economists, there are two
states of the process of
growth as:
1. Progressive State
2. Stationary State
Y Progressive
Phase
Regressive
Phase
Stationary
Phase
W
K
Capital Accumulation
Q
O
X
L
L1
Employment
…A Classical Model Of
Economic Growth
• The Rate of economic growth
depends on the rate of physical
capital accumulation.
- The faster physical capital
accumulates, Faster is economic
growth.
• The limit on the rate of growth:
diminishing returns.
- fL decrease as L rises, until
eventually the point when per
capita income reaches a steady
state level.
The Classical Model
The Classical Model of growth may be
expressed in the form of following
relationships:
1. The Production Function
O= f (L,K,Q,T)
Here O= Output; L= labour power; K= capital
accumulation;
Q=natural resources; T= level of technology
2. Technical Progress
T=f(I)
Here, T= Technical Progress; I= Investment
3. Investment
I=f(R)
I= Δk=f(R)
Here I = investment ;R=profits ; K=increase
in capital stock
4) Profit
Profit depends upon two factors, according to the
classical view :
a) Supply of labour
b) Level of Technology
R=f (L,T)
Here R =profits, L= supply of labour, T level of technology
5) Supply of Labour
W=f (I)
Here W is wage fund
6) Wage Fund
W = f ( I)
7) Closing System
O=R+W
Here O = total output ,R = profit, W = wages
This equation explains that total output is equal to total
profit and total wages
Stages of
growth
• Progressive State of Growth
ΔK
ΔT
ΔR
ΔK
• Stationary State of Growth
ΔK
ΔW
ΔL
ΔK
Criticism
• Over Emphasizes the law of Diminishing
Returns
• Less Importance of Technological
Progress
• Not only the Capitalists Save
• Malthusian Theory of poulation does not
Apply
• Say’s Law of Markets does not Apply
• Wages are not flexible
• Wrong Notation About Wages and Profits
• It Ignores Government Interference
Relevance of classical
Model
for underdevelopment
countries
• Importance of Agriculture Sector
• Balanced Growth
• Capital Accumulation
• Population Growth
• Laissez- faire Economy
Thanks***