Development lecture 2.ppt

Classical growth models tended to be less formal and mainly saw growth as a function of capital accumulation. These theories include those put forward by Smith, Ricardo, Malthus and Marx. Neo-classical growth models encompass the work of Solow and Harrod-Domar. We will focus attention mainly on the Solow model. The Solow model assumes that the level of GDP is a function of the quantity of capital, the quantity of labour and the level of technology. But because there is no easy way to measure technology, it ends up being treated essentially as a residual, i.e., whatever part of GDP is not explained by capital and labour is assumed to be due to technology. If we are interested in growth, then it is the changes in GDP over time that we want to look at. And if GDP depends on labour, capital and technology, then the change in GDP becomes a function of the growth of labour, the growth of capital and positive advances in technology. Then we can say that the rate of growth in a given period of time is explained by the rate of growth of labour, capital and technology over the same period of time. There are a number of points in this conclusion that are significant: The rate of growth of capital is obviously an important source of growth of income or GDP. The rate of growth of the labour supply also matters. We can also demonstrate that the rate of growth of labour will be approximately the same as the rate of growth of the population. The rate of technological progress also produces growth.But this is all based on a number of assumptions: The economy has the ability to support a larger population. All capital and labour is the same, what economists call homogeneous. Technological progress is available to everyone. Institutions are instantly available. Markets operate relatively perfectly. Some of these assumptions can be changed within the model. For example, we can distinguish between skilled and unskilled labour and then see which helps to best explain the