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    Development Economics BA-4706: Dr. Muhammad Aqil

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    alicia john
    Here are the steps to calculate Pakistan's HDI for 2018: 1) Life Expectancy Index (LEI) = (Life Expectancy - 20) / (85 - 20) = (66.6 - 20) / (85 - 20) = 0.648 2) Education Index = (Mean Years of Schooling Index + Expected Years of Schooling Index)/2 = (5.2-0)/(15-0) + (8.6-0)/(18-0) = 0.347 + 0.477 = 0.412 3) Income Index = (Ln(GNI per capita) - Ln(100)) / (Ln(75

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    Development Economics BA-4706: Dr. Muhammad Aqil

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    alicia john
    51 views29 pages
    Here are the steps to calculate Pakistan's HDI for 2018: 1) Life Expectancy Index (LEI) = (Life Expectancy - 20) / (85 - 20) = (66.6 - 20) / (85 - 20) = 0.648 2) Education Index = (Mean Years of Schooling Index + Expected Years of Schooling Index)/2 = (5.2-0)/(15-0) + (8.6-0)/(18-0) = 0.347 + 0.477 = 0.412 3) Income Index = (Ln(GNI per capita) - Ln(100)) / (Ln(75

    Original Title

    Development Economics Lecture 4

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    Here are the steps to calculate Pakistan's HDI for 2018: 1) Life Expectancy Index (LEI) = (Life Expectancy - 20) / (85 - 20) = (66.6 - 20) / (85 - 20) = 0.648 2) Education Index = (Mean Years of Schooling Index + Expected Years of Schooling Index)/2 = (5.2-0)/(15-0) + (8.6-0)/(18-0) = 0.347 + 0.477 = 0.412 3) Income Index = (Ln(GNI per capita) - Ln(100)) / (Ln(75

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    51 views29 pages

    Development Economics BA-4706: Dr. Muhammad Aqil

    Uploaded by

    alicia john
    Here are the steps to calculate Pakistan's HDI for 2018: 1) Life Expectancy Index (LEI) = (Life Expectancy - 20) / (85 - 20) = (66.6 - 20) / (85 - 20) = 0.648 2) Education Index = (Mean Years of Schooling Index + Expected Years of Schooling Index)/2 = (5.2-0)/(15-0) + (8.6-0)/(18-0) = 0.347 + 0.477 = 0.412 3) Income Index = (Ln(GNI per capita) - Ln(100)) / (Ln(75

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    of 29

    Development Economics

    BA-4706

    BBA 5
    Lecture # 4
    Dr. Muhammad Aqil
    Questions to be discussed

     What are the Characteristics of Modern


    Growth?
     What is the difference between economic
    theory and model?
     What are various Models of Economic
    Growth?
     HDI Calculation
    Important Factors of
    Economic Growth
    Important Factors of Economic Growth

    1. Capital Accumulation
     Positive Relationship
    2. Population and Labor Force Growth
     Greater the Skilled Labor, Greater the Growth
    3. Technological Progress
     Positive Relationship
    Production Possibilities Frontier
    Effects of Three Factors on PPF

    1. If Human Resource in Industry is improved


    2. If Human Resource in Agriculture Sector is
    improved
    3. If Technology in Industry is improved
    4. If all the factors in industry and agriculture
    are improved
    5. If Technology in Industry is improved and
    few of land becomes infertile.
    Classical
    Economic
    Growth Models
    Economic Theory and Model

     Economic theory are ideas and principles


    that tends to explain the relationships or
    function or process. Such as theory of
    demand, Supply, Market Equilibrium etc.
     Economic Model is the precise application
    representing the relationship between
    variables often in Mathematical terms.
     D= f(p)
     QD = 30 - 20 P
    Classical Theories of Development

    1. The Linear Stages of Growth Model (1950-


    60)
    2. Patterns of Structural Change (1970s)
    3. The International Dependence
    Revolution(1970s)
    4. The Neo-Classical Theories (1980s and early
    1990s)
    1. The Linear-Stages Theories

    i. Walt Rostow’s Stages of Growth


    ii. The Harrod-Domar Growth Model

    Rostow’s Stages of Growth


     Developed countries have tended to pass
    through 5 stages to reach their current
    degree of economic development.
    5 Stages of Rostow Growth Model

    i. Traditional society- Based on Primary Goods


    ii. Pre-conditions for take-off
     Agriculture becomes more mechanized 
     Small growth in Savings and Investment
     Foreign Aid and Remittances
    iii. Take-off
     Manufacturing Sector starts growing
     Agriculture Sector less important
     High Saving and Investment
    5 Stages of Rostow Growth Model…Cont.

    iv. Drive to maturity


     Diversified Industry
     Improved Technology
    v. Age of mass consumption
     High GDP
     Developed Tertiary Sector
     Mass Consumption
     Developed Middle Class
    ii. Harrod-Domer Model-Saving and
    Investment
     The Economic Growth depends upon Savings
    and Investment
     The Rate of Economic Growth depends upon
     Level of National Savings
     Productivity of Capital Investment i.e. Capital-
    Output Ratio
     What Is Capital Output Ratio?
     If $ 3 of Capital Produces $1 of GNI then
    COR= ∆K / ∆ Y = 3/1=3
    ii. Harrod-Domer Model …Cont.

     S= Saving Rate x Income OR


     S= SR x Y……………………..Equation 1
     But Investment = Change in Capital Stock
     So, I= ∆K ……………………..Equation 2
     Since, Capital Output Ratio = COR = ∆K / ∆ Y
     Or ∆K = COR x ∆Y ……………………..Equation 3
     As we know that S=I So, S=I OR
     (SRxY) = ∆K OR ……………………..Equation 4
     (SRxY) = COR x ∆Y OR ……………………..Equation 5
     ∆Y/Y = SR/COR and ……………………..Equation 6
     ∆Y/Y = GDP Growth Rate ……………………..Equation 7
     GDP Growth Rate = ∆Y/Y =Savings rate / Capital output ratio
     OR GDP Growth Rate = SR/ COR ……………………..Equation 8
     OR GDP Growth Rate = IR/ COR ……………………..Equation 9
     If the savings rate is 10% and the capital output ratio is 2, then
     GDP Growth Rate = 10/2 = 5% P.a.
    Application of Model

     Q.1: From 1980 to 1990, real GDP in India grew by 5.8 percent per
    annum, while investment averaged 23.1 percent of GDP. What was
    the COR for India between 1980 and 1990?
     Q.2: In Indonesia during the 1970s the capital-output ratio (COR)
    averaged 2.50%.
    a. Using the Harrod-Domar growth equation, what saving rate would have
    been required for Indonesia to achieve an aggregate growth rate of 8
    percent per annum?
    b. With the same COR, what growth target could be achieved with a saving
    rate of 27 percent?
    c. If there is a massive increase in the saving rate, and therefore a big
    increase in the amount of new capital formation, is the COR likely to rise,
    fall, or remain the same? Explain.
    Application of Model

     The government of a poor developing country


    fears that a political crisis will occur unless the
    growth rate is at least 4 percent per annum. The
    COR and the saving rate are projected to be COR
     = 5.0 and s = 14 percent, respectively.
    Required:
    a. Show that 4 percent growth cannot be achieved
    under these circumstances.
    b. With the saving rate as given, what COR would be
    required to achieve the 4 percent growth target?
    Application of Model-Solution

     Q.1: From 1980 to 1990, real GDP in India


    grew by 5.8 percent per annum, while
    investment averaged 23.1 percent of GDP.
    What was the COR for India between 1980
    and 1990?
     COR= ∆K / ∆ Y
     = 23.1/5.8 = 3.98
    Application of Model-Solution

     Q.2: In Indonesia during the 1970s the capital-output ratio (COR) averaged
    2.50%.
    a. Using the Harrod-Domar growth equation, what saving rate would have been required
    for Indonesia to achieve an aggregate growth rate of 8 percent per annum?
    Growth Rate = SR/ COR
    SR = GR x COR
    8 x 2.5 = 20%
    b. With the same COR, what growth target could be achieved with a saving rate of 27
    percent?
    GR = 27/2.5 = 10.8%
    c. If there is a massive increase in the saving rate, and therefore a big increase in the
    amount of new capital formation, is the COR likely to rise, fall, or remain the same?
    Explain.
    COR= ∆K / ∆ Y
    Rise
    Criticism on Rostow and Harrod
    Models
     Savings is Necessary Condition but not sufficient
     The Model worked for Europe due to Institutional
    and attitudinal Conditions
     The Model is not valid for Developing Countries
    due to the following reasons:
     Lack of Managerial Competence
     Lack of Skilled Labor
     Lack of Planning
     Lack of Goofd governance
     Lack of developed Markets
    2. Structural Change Model

     Structural Change Theory-


     Movement from Primary to Secondary and Tertiary
     From Rural to Urban
     From Traditional to Modern Techniques
    The Lewis Model
     A development model of  dualistic economy, i.e.
    rural agricultural and urban manufacturing sectors
     Initially, Majority of labors employed in Agriculture
     After sometime, the labors become less productive
    due to Law of Diminishing Marginal Returns
    The Lewis Model.. Cont…

     Underemployed labors will be shifted towards urban


    areas for industry
     Labors tend to produce a higher value of output in
    industry than agriculture
     The result is higher urban wages
     High wages would tempt surplus agricultural workers to
    migrate to cities and engage in manufacturing activity.
     High urban profits would encourage firms to expand
    and hence result in further rural-urban migration
    Criticisms of the Model

     The assumption of Re-investment of Profit


    may not be true
     Reinvestment may be in Capital instead of
    Labors.
     The assumption of mobility of labors from
    agriculture to industry may be wrong.
     Wage levels may vary in industry
    3. The International Dependence Models

    1. The Neocolonial Dependence Model


    Under development is due to exploitation of Capitalism and this
    economic system needs to be changed
    2. The False Paradigm Model
    Under development is the outcome of wrong advices from International
    agencies which need to rectify.
    3. Dualistic-Development Thesis
    There is always an existence and persistence of increasing divergence
    b/w rich and poor that prevent the weaker to grow.
    4. Recommendations
     They raise above questions on economic models
     Emphasis upon international power balance and political, economic
    and institutional reforms internationally and locally
    HDI Calculation

    1. Life Expectancy Index (LEI) = Life Expectancy of a


    country -20/ 85-20
     Life Expectancy Index =LEI = (LE-20)/(85-20)
    2. Education Index = (MYSI + EYSI)/2
     Mean Years of Schooling Index (MYSI) =
    MYS-0/15-0
     Expected Years of Schooling Index (EYSI) =
    EYS-0/18-0
    3. Income Index (II) =
    (Ln (GNI PC of Country) – Ln (100)/ (Ln (75000) – Ln (100 )
    HDI Calculation for Pakistan -2018

     Expected years of schooling (years) =8.6


     Mean years of schooling (years) =5.2
     Gross national income (GNI) per capita (2011 PPP
    $) = 5,311
     Life expectancy at birth (years) = 66.6
     Calculate HDI for Pakistan?
     http://hdr.undp.org/en/countries/profiles/PAK
     Ln(100) = 4.60517
     Ln (75000) = 11.22524
     Ln (5311) = 8.57753
    Human development groups

    HDI Value Life Expected Mean Years of Gross national


    Expectancy at Years of Schooling income (GNI)
    Birth – 2017 Schooling per
    capita
    Group

    Very high
    human
    development ??? 79.5 16.4 12.2 40,041

    High human
    development 0.757 76.0 ??? 8.2 14,999

    Medium
    human
    development 0.645 69.1 12.0 6.7 ???

    Low human
    development 0.504 ??? 9.4 4.7 2,521
    Human development groups

    HDI Value Life Expected Mean Years of Gross national


    Expectancy at Years of Schooling income (GNI)
    Birth – 2017 Schooling per
    capita
    Group

    Very high
    human
    development 0.894 79.5 16.4 12.2 40,041

    High human
    development 0.757 76.0 14.1 8.2 14,999

    Medium
    human
    development 0.645 69.1 12.0 6.7 6,849

    Low human
    development 0.504 60.8 9.4 4.7 2,521
    Life Expected Mean Years Gross
    Expectancy Years of national
    at Birth – of Schooling Schooling income
    2017 (GNI) per
    capita

    HDI
    Regions Value

    Arab States 0.699 71.5 11.9 7.0 15,837

    East Asia and the Pacific 0.733 74.7 13.3 7.9 13,688

    Europe and Central Asia 0.771 73.4 14.1 10.3 15,331


    Latin America and the
    Caribbean 0.758 75.7 14.4 8.5 13,671

    South Asia 0.638 69.3 11.9 6.4 6,473

    Sub-Saharan Africa 0.537 60.7 10.1 5.6 3,399

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