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ASSIGNMENT SOLUTIONS GUIDE (2018-2019)

M.E.C.-4
Economics of Growth and
Development
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Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in
about 500 words each) those in Section B carry 12 marks each (to be answered in about 300 words each).
In the case of numerical questions word limits do not apply.
SECTION-A
Q. 1. Examine the effect of population growth in the Solow model of economic growth. Discuss how
the Solow model could be used to explain poverty traps in developing nations.
Ans. Some Applications of The Neo-classical Model
Depreciation of Capital Stock
If there is no depreciation at all,
Gross Investment = Net Investment
or I = K
If capital depreciates at say
a%, we can say
I = K + aK
where I = Gross Investment
k = Net Investment
a = Rate of depreciation
Dividing both sides by L, we get
I K ak
=
L L+ L
I K
= (1 + a) ...(2)
L L
We know that
K
= k + nk (divided in the structure of Solow Model)
L
Substituting this equation (2)
I
= k + nk + ak
L

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 I
= k + (n + a)k ...(3)
L
Since in equilibrium,
S = I
I S
can be written as which is denoted as sf(k)
L L
∴ Sutting these values in equation (3), we get
sf(k) = k + (n + a)k
sf (k )
or k = – (n + a) k
k
k = sf (k )
or – (n + a)
k
This is equation for depriceation of capital stock. Actually, it is only the modification of fundamental equation of
the Solow Model.
Variable Savings Rate
Solow Model does not assume saving rate to be constant. In Solow model, as savings increase from s1 to s2, it
leads to increase in sf(k) and hence sf(k) curve shifts upward. It causes a newer point of intersection between sf(k)
and nk. At new equilibrium point, k and y both will increase. At higher rates of savings, the economy will have a large
capital stock and output. But increase in savings will increase the output per person only temporarily.
Many economists have emphasized that nations should raise their savings to stimulate the rate of economic
growth. But Solow’s Model is indicating that a permanent change in savings rate i.e. MPC has only temporary effect
on the economy’s Growth Rate. This is called Solowian Paradox of Thrift. In order to bring a permanent increase in
growth rate, we need to work on improvement of technology.
Population Growth
Population is an asset as well as a liability. Solowian model is also used to explain the effect of increase in
population on growth rate.
If in an economy, population is increasing, at a rate denoted by n, it will increase the number of workers available
and hence, capital per worker i.e. k will fall. We know that
∆k = sf(k) – nk
So, an increase in population (n, the level, not rate) reduces k.
Now if there is change in the rate of population itself, say, population increases from n0 to n1, then nk line will tilt
upwards. New equilibrium will be at to the left of previous equilibrium point. This will cause k to fall. As it has been
explained earlier, y = f(k), a reduction in k will reduce y as well. Therefore, a developing country must take care that
population does not increase too much in order to maintain full employment equilibrium.
Convergence and Poverty Traps
Convergence
Solow Model claims that over a long period of time, all nations of the world would tend to converge towards same
rate of growth. It is referred to as convergence.
Following reasons are given for convergence:
(a) Since rate of return on capital is higher in countries where capital is relatively scarcer, hence, capital will flow
from the developed countries to developing and under-developed countries.
(b) As Solow model claims that all countries attain balanced growth path in the long run, it would converge.
(c) As capital will move from developed countries to developing and under-developed countries, the incomes of
poorer countries will also increase.
Types of Convergence
(a) Absolute Convergence: It states that if n number of countries have access to same technology, have same
saving ratio, same population growth rate but different capital output ratio, then all countries would converge to same
level of equilibrium steady growth rate. It is so because capital output ratio will be higher in poor country and hence,
capital and output in poor country will grow at a rate faster than the rate of growth of population. While, capital and

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output in rich country will grow at a rate slower than the rate of growth of population. It implies that the poor country
will grow at a faster rate than rich country. The gap between two counties will narrow down.
Empirical evidence has not supported the existence of absolute convergence. So, the concept of conditional
convergence came into the picture.
(b) Conditional Convergence: Conditional convergence states that if n number of countries has access to
same technology, same population growth rate but different saving ratios and capital labour ratio, then there will still
be convergence at same growth rate but equilibrium capital-output may or may not be equal. This is so because of
paradox of savings which states that a permanent change in savings rate i.e. MPC has only temporary effect on the
economy’s growth rate. In real life scenario, even conditional convergence is not observed because different countries
have different population growth rates.
In order to examine the validity of the unconditional convergence, a well known study was conducted by Baumol,
which should have shown inverse relationship between initial per capita level and growth rate of per capita income to
prove that conditional convergence actually operates. But, Baumol found a regression which showed almost perfect
convergence.
Baumol’s findings were challenged by Bradford De Long on two grounds: (a) Sample selection was biased; (b)
there was measurement error in the findings.
Poverty Traps
Neo-classical model exclaimed that in the long run, all nations of the world would tend to converge towards same
rate of growth. But the hypothesis did not hold true in real scenario. This was claimed that poor nations will grow at
a higher rate and gradually the gap between nations will disappear. But the poor nations were actually caught up in a
situation where they could not come out of the vicious circle of poverty. This is called poverty traps. Poverty traps can
be (a) Technology induced; (b) Population induced.
(a) Technological Trap: Technological trap states that if a country receives an initial injection of capital so as to
increase k, the level of output will be pushed over. It is called ‘Big Push Theory’. Poverty trap is caused by low
savings, backward technology and is also called vicious circle of poverty.
(b) Population Trap: Neo-Classical Model assumes that population is a factor which is exogenously determined
at a rate denoted by n. but as is explained by demographic theory of population, that with increase in standards of
living birth rate continues to be same, but death rate fall in second phase leading to population explosion. Now if
population growth is not exogenously determined by is a function of per capita income y, then
G = F (y)
Y = F (K/L)
⇒ n = F (K/L)
If there is a given range of k say k1 – k2, then for k < k1, or k > k2, n is < 0. For any value of k between k1 and
k2, n is > 0. When n is > 0, the value of n itself f can change. It will lead to change in shape of saving curve and may
not be S shaped any more. In this situation, it can intersect sf(k) at many points and we may have multiple equilibrium
points of k, which are unstable and hence there is instability in the economy. That value of k will give s stable
equilibrium which lies within our range of k1 – k2
Q. 2. Describe the Mankiw-Romer-Weil extension to the neo-classical model to include human capital.
Explain why diminishing returns to capital do not take place in the AK model.
Ans. Solow growth model stated that if initial conditions were similar in different countries, eventually the levels
of income of these countries would converge. In other words, it claimed that the growth rate will be faster in poor
countries than in rich countries and gradually income inequalities amongst nations would disappear. But empirical
study brought into light two facts:
(a) Growth rate of almost all economies of the world has been faster than population growth.
(b) The growth rate of different nations did not converge for a very long time as claimed by Solow.
Hence, a need was recognized to build models where there is infinitely rise in per capita income. This research
continued to consider capital accumulation as one of most determining factor in economic growth but in this model the
meaning of capital accumulation has been broadened by including human capital into it. Mankiw, Romer and Weil
gave a marginal extension to the neo-classical model in their paper that published in 1992. They considered human
capital not as part of labour but a distinct factor of production. The model maintains Solow’s assumption of diminishing
returns to the capital as a factor of production.

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 The structure of the Mankiw, Romer and Weil model can be presented by assuming an economy which produces
output Y using physical capital in combination with human capital. According to constant returns to scale, Cobb-
Douglas production function will be:
Y = Ka (AL) 1–a
Where A is coefficient of labour augmenting technology which is growing at an exogenous rate g.
How do people accumulate Human Capital?
Different economists have varies views on how people accumulate human capital. According to Mankiw, Romer
and Weil people sacrifice their present consumption to accumulate human capital.
Lucas opined that people spend on accumulating new and scarcer skills which enhances their economic worth.
The ides was proposed first of all by Kenneth Arrow in his article, “The Economic Implications of Learning New
Skills and Foregoing Working for that Period” in the year 1962.
We are explaining a type of presentation given by Lucas.
If q is the proportion of time spent in learning new skills and L be the total amount of raw labour used in
production. When L amount of the unskilled labour spends q proportion of their time on in learning new skills then let
us assume that H amount of skilled labour is produced as per following function:
H = eφq L
Where φ is a constant.
It claims that if in an economy, q = 0, L = H, and all labour is unskilled then by raising q, the effective unit of H i.e.
skilled labour can be increased.
Now let us see how does capital accumulation take place. Like in the solow model,
K = Sk y – δK
Dividing above eqn by stock of unstilled labour, L
K Sk Y δk
= –
L L L
The model assumes q to be constant and an endogenous variable, h = eφq hence is a constant. Therefore, along
a balanced growth path.
Rate of growth of K and L = g i.e. rate of technical progress.
y = k
Where
k = Sky – (n + g + δ) k
k Sky
=
y n+ g + δ
Putting this eqn into the production function in terms of the equation involving y, we can find the stady stete value
of output technology ratio y’
a
 Sk 1– a
y* =  
 n + g + δ 
Thus, the explanation and equations explain us the causes for the difference in the growth levels of different
countries. The countries that spend highly on physical capital, have better technology and spend a high proportion of
time in accumulating new skills are relatively richer than those which do not give due importance to investment in
physical and human capital.
Difference between Knowledge Capital and Human Capital: Knowledge facilitates the accumulation of
human capital. In other words, knowledge capital is the means to attain human capital which in turn is the means to
increase the rate of growth.
The basic equation of the model is:
Y = AK
Where A is symbolic of factors affecting technology and K includes physical as well as human capital. The model
rejects that proposition of diminishing returns. It claims that externalities or spillovers and increasing quality and
variety of intermediate inputs do help to avoid diminishing returns.

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 Generally, speaking lesser importance has been given to technology because endogenous growth theory admits
that technology does not explain much of the growth. Initially, technology was given a high importance. But then some
economists claimed that there is not much need to understand technology as it is a very small part of the contribution
to growth process. They feel that it is so small that it can even be ignored. But it is not logical. Solow model as well
as empirical evidence shows that even if capital formation directly contributes to growth, without technological
advancement, growth would stop. It is so because it is technology that causes investment in the capital and indirectly
causes all the growth. It is technological advancement that makes it possible to get increasing returns from all relevant
inputs.
SECTION-B
Q. 3. Distinguish between economic growth and development. Briefly mention the main benefits that
economic growth confers upon society.
Ans. The difference between economic growth and economic development are:
1. Economic Growth is quantitative while economic development is qualitative.
2. Economic growth is comparatively a narrow concept and development is much more comprehensive.
3. Economic growth refers to increase in the total output of final goods and services in a country over a long
period of time. In contrast, economic development refers to progressive change in the socio-economic structure of
the country. It includes gender equality, change in composition of output, shift of labour force from agriculture to other
sectors.
4. Economic growth is easy to realize as only monetary aspect is involved. But, it is very difficult to attain the goal
of development as it involves many socio-economic-political aspects.
5. Economic growth can easily be estimated by real GDP or Real Per Capita income. But it is very difficult to
measure development as it has some aspects that can’t be quantified. Economic development however is indicated by
Human Development Index.
6. Economic growth can take place without Economic development; however, economic development can’t take
place without economic growth.
The Importance of Economic Growth
There is no empirical evidence to the fact that there is a strong and positive relationship between wealth resulting
from rapid growth and happiness. To your surprise there is evidence of high levels of dissatisfaction in the high income
countries than low income countries. But don’t misinterpret the fact that growth is undesirable. Certainly it is not.
Economic growth can alter the relative incomes compared to other economies. There are many advantages of having
a high economic growth rate. Some of these are listed below:
1. It creates ability to access better standards of living in materialistic terms. It allows people to expand their
consumption pattern from only basic to education, health, scientific research, entertainment, tourism etc. An economy
where national income is too low, people can’t afford even the basic needs how can we think of expanding effective
demand.
2. Higher rates of economic growth means higher level of per capita income which lead to reduction in social
conflicts arising for housing, better wages, health, education and other amenities. When resources are abundant, there
are lesser conflicts which in turn reduces crime rate in the country.
3. Higher level of economic growth might help human beings to have a better control over environment. It might
help to increase life expectancy, getting cure for many diseases and expanding control over resources.
4. Economic growth always tends to increase the number of women involved in economic activities. It helps them
to have a better control on their lives, improves their value in the family and certainly enhances labour force for the
economy which helps in further enhancement of the rate of economic growth. Reduction in gender inequality also
solves many other social issues relevant for economic development like infanticide or adverse sex ratio.
5. Economic growth can help a society to come out of many problems which arise due to financial crisis. It is very
much possible that as income rises, some people might get willing to forgo a part of their income to uplift the needy.
6. Poverty alleviation can best be done through higher rates of economic growth in an economy. This is called
trickle down effect. As an economy grows, the benefit of growth trickles down to all sections of society and hence
gradually poverty gets alleviated.

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 Q. 4. Describe Pasinetti's theory of economic growth and distribution.
Ans. Pasinetti’s theory of growth and distribution is a refinement or a corrected reformulation of Kadlor’s
model. He criticized Kadlor’s model for its formulation of existence of only one saving ratio that keeps system in
equilibrium for any given rate of population growth and technical progress. In his words, “In any type of society,
when any individual saves part of the income, he must also be allowed to own it; otherwise he would not save at all.”
Accordingly, he divided total profits into two parts one part accrues to the capitalists and other to the workers.
Reformulating the Kaldorian Model
As given above, he catagorised profits into two parts, so–
P ≡ Pk + Pw
Where, Pk and Pw stand for the respective share of capitalists and workers in the profits.
Therefore, new saving functions are Sw = Sw(W + Pw) and Sk = Sk.Pk and equilibrium condition is
I = Sw = Sw (W + Pw) and Sk = Sk.
From this we can derive the following general equations. These two equations contain all the elements required
to correct the post Keynesian theory of income distribution.
P/Y = 1/ Sk – Sw. I/Y – Sw/Sk – Sw + I (SwSk/Sk – Sw .. K/I – Sw/Sk – Sw . K/Y)
P/K = 1/Sk – Sw.I/K – Sw/Sk – Sw + Y/K + iKw/K.
Rate and Share of Profits
in Relation to the Rate of Growth
Pasinetti maintains that in the long run model, rate of interest must be equal to rate of profits. In such a case one
can substitute P/K for I, and we get:
P/K (Sk (I – Sw .Y)
= I – S w. Y/K
∆
Hence, the result is that we do not need to make any assumptions about propensities to save of the workers. In
the long run, MPS of workers influences the distribution of income between workers and entrepreneurs but does not
influence the distribution between profits and wages and the rate of profits.
Fundamental Relation
between Profits and Savings
Pasinetti proved that in the long run profits will be distributed in proportion to the amount of savings that are
contributed by workers and entrepreneurs respectively. No matter how many categories of economic agents are
there, the ratio of profits to savings will always be for all categories.
Implications of the Model
Two conclusions given by the model are:
1. As the model gave conclusion without assuming a constant saving ratio, it has become much wider. The
model does not demand to take any hypothesis about saving behaviour of the workers.
2. The relation between capitalists’ savings and capital accumulation is based on simplifying and drastic assumption
of negligible savings by the workers.
Conditions of Stability
1. Prices are flexible with respect to wages.
2. Full employment investments are carried out.
3. Sk > 0.
Q. 5. Describe the various approaches to the measurement of total factor productivity.
Ans. There are five methods of measuring total factor productivity. The first two are growth accounting techniques
and the other three are econometric tools.
Data Envelopment Analysis (DEA): This approach to productivity measurement is completely non-parametric
and makes use of linear programming. This technique was first used by Farrell in 1957 and later it was operationalised
by Charnes, cooper and Rhodes in 1978. This approach compares the ratio of linear combinations of outputs over
linear combinations of inputs. It defines that a firm is efficient which has highest output-input ratio for any combination
of outputs and inputs. In some situation no firm may be efficient.
2. Index Numbers (TFP): In this approach, under a number of assumptions, it is possible to calculate A, the
technology coefficient or TFP coefficient without a specified exact production function or rigidly assuming it to be

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uniform across observations. There are two indices: Solow Index (developed by Solow in 1957) and Translog index
(developed by Diewert in 1976).
Solow Index: Solow index assumes that elasticity of substitution between labour and capital to be equal to one.
In other words if interest goes up by 5% employment of labour will increase by 5%, it has an important implication
that income shares of labour and capital remain constant. Solow index of TFP is equal to:
lnA = lnY – (1 – α)lnL – αlnK
Translog Index: The translog index of TFP is equal to:
∆lnTFPt = ∆lnYt – [(SLt + SLt – 1)/2* ∆lnLt] – [[(SKt + SKt – 1)/2 * ∆lnKt]
Where, Y is output, L and K are labour and capital respectively, SL and SK are shares of income of labour and
capital respectively, TFP is total factor productivity.
Advantages of this index:
1. It does not take rigid assumptions about elasticity of substitution.
2. It does not require technology progress to be Hicks neutral.
3. Specification of technology is flexible.
4. Method can easily handle multiple outputs and a large number of inputs.
Disadvantages of the index:
1. It requires quality and reliable data.
2. It is impossible to account for measurement error.
Econometric methods: In econometrics, we apply regression analysis to estimate a production function and
from estimated production function we get the rate of technical progress. Generally, Cobb-Douglas Production function
is used. There are also Semi parametric procedures to address the issue of productivity.
Limitations of Total Factor Productivity Measures
(a) Certain rigid assumptions make it unrealistic and hence limit its use in real life.
(b) Econometric models do not take such rigid assumption and hence are appreciated but it assumes that same
rate of technological progress for all the years under study. It is not so.
Q. 6. What are the main propositions of the Real Business Cycle model? Describe the basic structure
of a prototype Real Business Cycle model.
Ans. Real Business Cycle model is technically an explanation of Brock-Mirman Model. They explained, “What
happens under uncertainty” and Real Business Cycle explains, “Why does it happen so?”. It tried to explain the
reasons for fluctuations in economic activity at macro level.
Real Business Cycle model Makes two types of propositions:
(a) It says that long-term growth and short-term fluctuations in economic activity are studied separately but for
both of them same reasons are responsible. The theory uses the word fluctuations and not cycles as the latter
conveys as if it occurs regularly which might not be true.
(b) The word ‘real’ in the Real Business Cycle Model suggests that this theory like classical economists considers
money to be veil and plays down the role of monetary forces. In their opinion money plays a neutral role and
fluctuations are brought about by real factors like investment, demand, supply etc.
The Real Business Cycle Model criticizes on Keynesian approach that it gives too much emphasis on the aggregate
demand. This theory gives a greater emphasis on supply side and therefore, is sometimes also called ‘New-Classical’.
However, there can be many types of external shocks. These shocks can originate on either demand side or
supply side. These shocks may be caused even by monetary and fiscal policy of the government. But the focus of The
Real Business Cycle Model is on productivity shocks. There are different types of productivity shocks:
(a) Development of new techniques;
(b) New management practices;
(c) Bumper crop or crop failure;
(d) New Suppliers coming from external economy etc.
The Real Business Cycle Model explains productivity shocks and the extension as well as impact of these shocks
on other variables in the economy.
The Real Business Cycle Model is built upon Brock-Mirman Model of the type in which discounting is present.
The model explains a decision regarding labour and leisure where it is assumed that leisure also gives utility.
The structure of the model is similar to that of optimization under uncertainty.

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  ∞

We need to maximize a utility function like E ∑ α u(ct + j,l t + j) . Here c and l are household’s and leisure
j

 j=1 
activities.
Each household has access to a gives technology (as each household is playing dual role in the economy. Each
hosuehold is a firm as well.
yt = zt t (Ldt , Ktd )
When Z = randorm verible depicting technology L and K denote lobous and capital supplied in the time period t.
L = 1 – l where l is leisure
therefore, the Budget constraint is:
ct + Kt+1 = Zt f (Ldt , Ktd ) + ( 1 – δ) Kt
– w (Ldt – L t ) – r(K td – K t)
Where w = wage rate
r = rate of interest
This equation is explained one should usury dynamic programming and a constrained optimization increase. It also
explains shocks – how they generated in the economy.
Q. 7. Compare and contrast the Uzawa two-sector growth model with the Feldman model
Ans. Hirofumi Uzawa put forward this growth model in 1961 and 1963 via his articles. Uzawa’s model is a two
sector extension of Solow-Swan Neo-classical growth model.
Let us assume that there are two goods a consumer good say corn denoted by c, and a capital good tractor
denoted by k. Both the goods are being produced under constant returns to scale. Therefore, the production function
of both the goods are:
Yk = Fk (Kk, Lk)
Yc = Fc (Kc, Lc)
Where Kk and Lk are the amounts of capital and labour employed in the production of capital good and Kc and Lc
are amounts of capital and labour employed in the production of consumer good. Let
k = Kk + Kc and
l = Lk + Lc then since we have assumed that labour and capital are shiftable in the two sectors, therefore the
production function of the two sectors can be written in per-worker form as:
yk = F (kk)
yc = F (kc) where Yk = Yk/Lk; kk = Kk/Lk; yc
= Yc/Lc; kc = Kc/Lc.
It is assumed that labour grows at a constent rate.
.L
= n = gL
L
On the basis of the assumptions that both the sectors are minimizing profits and the wage rate and the rental
profile are same in both sectors therefore,
∂Yk
P k = ∂K = r, and
k

∂Yc
P c = ∂K = r;
c

∂Yk
Pk = ∂L = w, and
k

∂Yc
Pc = =w
∂Lc
where Pk is the price of capital good and Pc is the price of consumer good.

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 w
r is the ratio of wage rate to rectal capital.
Rental capital is a function of the physical marginal product of the capital in the capital goods sector and the
consumer goods sector.
Euler’s theorem will operate in both sectors because it is assumed that constant retuns to scale are provided
therefore wages in capital goods sector are w = Pk Yk – k4 Pk F′( Kk)
Similarly wages in consumer goods sector are:
w = Pc Yc – Kc Pc F′ ( kc)
It implies
w F (kk )
r = F′( kk ) – Kk in capital goods sector;

w F (k )
c
and r = – Kcin consumer good sector, Like Kadlor if we make on entre assumption that all profits are
F′( kc )
saved and all wages are communed given above facts, in the equilibrium the following conditions are satisfied.
Yk = Sk (Kk, Lk), Yc = Lc (Kc, Le)
∂Yc ∂Yk
Pk = r, P c = ∂L = w
∂Kk k

∂Yc ∂Yc
Pc = r, P c = ∂Lc = w
∂K c
Kc+ Kk = K, Lc + Lk = L
Pc Yc = w L Pk Y = r k
If we assume that capital goods sector has two uses:
1. To replace net increases in the stock of capital goods.
2. To replace the depriciating capital goods then the rote of capital stock is:
.
K = Yk – ∂ Κ
Saving–Investment equation is:
rk
Yk = P
k

Putting it in equation given above,

.
K=
rk
– δK
Pk
On solving the equation, we get
δ′ (Kk) = (n + δ)
Therefore, if Kaldor’s type of assumption about saving and investment is taken in Uzawa model then we can say
that balanced growth path would be attained when the marginal product of capital in the capital goods industry is equal
to the sum total of growth in the labour force and a constant rate of depreciation. Such a balanced growth path is
possible to be attained if the capital-labour ratio in the consumer goods sector is never less than capital-labour ratio in
the capital goods sector. If above condition is fulfilled, it would not make any difference what is the ratio of wages and
profits.
The Feldman Model
G. A. Fredman was a Russian economist who worked to solve the problems of planning in the newly formed
Soviet State Planning Commission. The Fredman Model is very much different from the Uzawa two-sector model.
Assumptions of the Model:
(a) The Feldman Model assumes that the economy is divided into two sectors such that sector A produces capital
goods and these capital goods can be used in either sector but once installed they can’t be shifted form one sector to
another.

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 (b) The Fredman Model assumes that production of goods in sector 1 is independent of production of goods in
sector 2.
(c) The Model also assumes that the economy is a closed economy.
(d) The Model claims that capital does not depreciate at all and hence capital is equal to investment.
(e) The Feldman model assumes that production is carried out in both the sectors with fixed co-efficients technology.
Working of the Feldman Model: The output of sector A can be installed as investment in either
sector:
Ka
I = Ya =
wa
Rate of change in investment is:
.I= Y = 1
Ka
.
a ...(1)
wa
The rate of change in Ka depends on the precentage of the total investment goods rector that is allocated to sector
therefore
.
K = Ia = α I
Substituting this into equation (1), we get
.I= 1
wa α I
.I α
= w ...(2)
I a

Therefore, in Feldman Model, the investment growth rate is a positive function of α and a negative function of
wa.
Consumption is equal to output in sector b.
kb
C = Yb = and the rate of change in consumption of consumer goods is:
wb
.
. .K
C=Y = b ...(3)
wb

We know that
.
Kb b= I = ( 1 – α) I
Putting it in equation 3, we get
.(1 – α) I
C
=
C wb * C
It proves that the rate of growth of consumer goods sector is dependent on investment.
Two implications of the Feldman model are as follows:
(a) Generally, speaking, in an economy the rate of consumption is not equal to rate of investment. With the time,
the rate of the growth of the consumption increases until it reaches the long run growth rate of the economy. It is
given by the rate of investment which is equal to a/w1.
(b) Another important fact revealed by the model is that the generally the rate of growth of the national income
is not equal to the rate of growth of total investment. It will tend to be equal to a/w1 in the long run. Therefore, the
model suggests that it is advisable for policy makers to increase the proportion of current capital goods engaged in
producing more capital goods as this will increase the rates of growth of consumption, investment and output in the
long run.

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 The Feldman Model influenced the model developed by P. C. Mahanalobis who divided the capital goods sector
into two types of capital goods: C- Type capita goods that produce consumer goods and K type capital goods that are
used to produce other capital goods. Hence, to conclude we can say that P.C. Mahanalobis gave a model which is an
extension of Feldman’s model when there is more than one type of capital goods.

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