Economic planning and

development models

BY
RABEEH OK
SHARATH G. PILLAI
PONNY MARY PIOUS
 Economic planning and development model

 There are three models of economic planning and

development model
1. Mahalanobis Model
2. Kaldor model
3. Harrod- Domar Model
 Mahalanobis model

 This model is known as a model of economic

development
 Created by soviet economist GA feldman in 1928 and by
statistician prasanta chandra mahalanobis in 1953
 Mahalanobis is central to second 5 year plan
 Shift in the pattern of industrial investment towards
building up a domestic consumption
 In order to reach a high standard in consumption,
investment in building a capacity in the production of
capital good is required
 In long run the presence of high capacity in the capital
good sector expands the capacity in the production of
consumer goods
 implementation of model

 The model was introduced in 2nd five year plan

 Prime minister nehru implemented this plan
 1st 5 year plan stressed on investment for capital
accumulation
 The model inability to cope with the real
constraints
 Ignores fundamental choice problems of planning
 the lack of connection between the model and
actual selection of projects by GOVT.
 Assumption

 Assumptions of a close economy

 Consist of 2 sectors
1. Consumption goods sector C
2. Capital goods sector K
• Capital goods are not shift able
• full capacity production
• investment is determined by supply of capital good
• No changes in prices
• Capital is the only scares factor
• Production of capital goods is independent of
production of consumer goods
 Basics of the mode

 The full capacity output equation is as follows:

 In the model the growth rate is given by both the share of

investment in the capital goods sector,
 the share of investment in the consumer goods sector
 If we choose to increase the value of to be larger than , this
will initially result in a slower growth in the short-run, but in
the long run will exceed the former growth rate choice with a
higher growth rate and an ultimately higher level of
consumption. In other words, if this method is used, only in
the long run will investment into capital goods produce
consumer goods, resulting in no short run gains.
 Criticism

 One of the most common criticisms of the model is

that Mahalanobis pays hardly any attention to the
savings constraint
 Developing countries however do not have this
tendency, as the first stages of saving usually come
from the agricultural sector.
 He also does not mention taxation, an important
potential source of capital.
 A more serious criticism is the limitation of the
assumptions under which this model holds,.
 Kaldor model

 Nicholas Kaldor in his essay titled A Model of Economic

Growth, originally published in Economic Journal in 1957
 postulates a growth model, which follows the Harrodian
dynamic approach and the Keynesian techniques of analysis.
 In his growth model, Kaldor attempts "to provide a framework
for relating the genesis of technical progress to capital
accumulation",
 According to Kaldor, "The purpose of a theory of economic
growth is to show the nature of non-economic variables which
ultimately determine the rate at which the general level of
production of economy is growing, and thereby contribute to
an understanding of the question of why some societies grow
so much faster than others."
 Assumption

 The basic properties of Kaldor's growth model are as follows:

 Short period supply of aggregate goods and services in a growing economy is

inelastic and not affected by any increase in effective monetary demand. As it
is based on the Keynesian assumption of "full employment".

 The technical progress depends on the rate of capital accumulation. Kaldor

postulates the "technical progress function", which shows a relationship
between the growth of capital and productivity, incorporating the influence of
both the factors. Where the capital-output ratio will depend upon the
relationship of the growth of capital and the growth of productivity.
 Wages and profits constitute the income, where wages comprise salaries and
earnings of manual labour, and profits comprise incomes of entrepreneurs as
well as property owners. And total savings consist of savings out of wages and
savings out of profit.

 Harrod-Domar Theory

 The Harrod–Domar model is an early post keynesian model

of economic growth. It is used in development economics to
explain an economy's growth rate in terms of the level of
saving and productivity of capital. It suggests that there is no
natural reason for an economy to have balanced growth. The
model was developed independently by Roy F. Harrod in
1939, and Evsey Domar in 1946.
 The shortcomings of the Harrod–Domar model have been
discussed in the late 1950s by neoclassical economists, which
eventually led to the development of the Solow–Swan model.
 According to the Harrod–Domar model there are three kinds
of growth viz. warranted growth, actual growth and natural
rate of growth.
 Warranted Growth rate is the rate of growth at which the
economy does not expand indefinitely or go into recession.
Derivation of output rate
 Criticisms of the model

 The main criticism of the model is the level of assumption, one

being that there is no reason for growth to be sufficient to maintain
full employment.
 Model is based on the belief that the relative price of labour and
capital is fixed, and that they are used in equal proportions.
 The model explains economic boom and bust by the assumption
that investors are only influenced by output (known as
the accelerator principle) this is now widely believed to be false.
 In terms of development, critics claim that the model sees economic
growth and development as the same; in reality, economic growth is
only a subset of development.
 Another criticism is that the model implies poor countries should
borrow to finance investment in capital to trigger economic growth;
however, history has shown that this often causes repayment
problems later.