General Growth Model
General Growth Model
Presented by:
Elisa de Guzman –Arpilleda
GENERAL GROWTH MODEL
The Classic Theories of Economic Growth and
Development has four approaches namely:
(1) Linear Stages of Growth Model,
(2) Theories and patterns of structural change
(3) International-dependence revolution,
(4) Neo-classical or free market counterrevolution
1. Linear Stages of Growth Model
One of the first growth theories was that proposed by
American economic historian Walt Rostow in the early
1960s. As a vigorous advocate of free market capitalism,
Rostow argued that economies must go through a number of
developmental stages towards greater economic growth.
This model suggest that development occurs in defined set of
stages. All developed economies have gone through some
variation of these stages, and all developing countries are in a
variation of one of the stages.
The oldest and most traditional of all development
models.
Rostow Model (Stages of growth)
a. Traditional society
The characteristics of this stage are:
- Largely agrarian
- Limited infrastructure
- Imperfect information
- Low degree of monopoly power
- Limited market interaction
- Sustenance agriculture
b. Preconditions for take-off into self-sustaining growth
The characteristics of this stage are:
- Growing market interaction
- Increasing access to agricultural technology
- Low levels of market specialization and
diversification
- Start of formal human capital
accumulation
- Rudimentary financial markets
c. Take - off
The characteristics of this stage are:
- Increase emphasis on formal human
capital formation
- Growth of financial markets (albeit
localized ones
- Increased market activity and
international trade
- Early development of international trade
as an important component of total economic
activity
- Development of industrial sector
- Urbanization
- Reduced income inequality
d. Drive to maturity
The characteristics of this stage are:
- Fully developed national financial sector
- Heavy industrialization with specialization
- Model transportation sector
- Exploitation of scale and scope economies
- Urban centers are more important than rural
areas
- Emergence of a middle class
- Extensive international trade
- Formal human capital "industry"
e. Age of mass consumption
The characteristics of this stage are:
- Fully industrialized
- Low dependence on domestic production
- Fully developed financial markets
- Consumer credit industry
- Information infrastucture
- Middle class majority
Harrod Domar Growth Model
-The H-D model adds a formal explanation of the
take-off stage of the Rostow model. The model is based
on the principle that capital accumulation is necessary
for economic growth.
-The Harod Domar Model suggests that economic
growth rates depend on two things:
a. Level of Savings (higher savings enable
higher investment)
b. Capital Output Ratio (efficiency of
investment)
For Harrod and Domar, economies must save and
invest a certain proportion of their income to grow at a
certain rate – failure to develop is caused by the failure
to save, and accumulate capital.
It is argued that in developing countries saving rates
are often low, if left to the free market. Therefore, there
is a need for governments to increase the savings rate
in an economy. Alternatively, developed countries
could step in and transfer capital stock to the
developing countries, which would increase the
productive capacity.
2. Theories and patterns of structural
change –the Lewis Model
a. Free-market approach
b. Public choice approach
c. Market-friendly approach
Other Theories under General
Growth Model
1. Schumpeter’s Model Of Economic Development
Schumpeter assumes a perfectly competitive
economy which is in stationary equilibrium.
In such a stationary state, there is perfect
competitive equilibrium. No profits, no interest rates,
no savings, no investments and no involuntary
unemployment.
Development consists in the carrying out of new
combinations for which possibilities exist in the
stationary state. New combinations come about in
the form of INNOVATIONS.
The Schumpeterian model of economic
growth moves round the inventions and
innovations. This model is explained with
the: Process of Production, Dynamic Analysis of
the Economy, Trends of Growth, The Demise of
Capitalism.
2. Endogenous Growth Theory