Sunday, March 4, 2012

IGNOU MEC-004 Free Solved Assignment 2012



MEC-004 ;  ECONOMICS OF GROWTH AND DEVELOPMENT
(Asst. Code: MEC-004/AST/2011-12)

Section A

Q.1      Critically examine the basic formulations of the Harrod-Domar model of economic growth. How does the Harrod model explain the occurrence of trade cycles?

Ans.     The basic formulations of the Harood-Domar Model of economic growth are summarized as follows: -

(i)         Investment is the central theme of the HDM. It plays a dual role. On the one hand it generates income and on the other it creates productive capacity.

(ii)        The increased capacity results in greater output and greater employment, depending on the behavior of the income.

(iii)       Condition regarding the behavior of income can be expressed in terms of growth-rates i.e , G, Gw and Gn. The equality between these growth rates would ensure full employment of labour and full utilization of capital stock.

(iv)       These conditions, however, designate only a steady-line of growth. The actual growth rate may differ iron the warranted growth rate. If the actual growth rate is higher than the warranted rate of growth, the economy will experience cumulative inflation. If the actual growth rate is lower than the warranted growth rate, the economy will hurtle towards cumulative deflation.

(v)        The business-cycles are viewed as the deviations from the path of steady growth. These deviations cannot go on indefinitely. There are constraints on upper and lower limits. The “full employment ceiling” acts an upper limit and autonomous investment and consumption act as a lower limit. The actual growth-rate fluctuates between these two limits.


            Harrod has used his model to explain trade cycles. In the recovery phase, because of the existence of unemployed resources, G>Gn. When full employment is reached G = Gn. If Gw exceeds Gn at the full employment, slump is inevitable. Since G had to fall below Gw, it will, for the time being, be driven progressively downwards. Further, G itself fluctuated during the course of the business cycle. Savings as a fraction of income, though fairly steady in the long run, fluctuate in the short run. In the short run, savings tend to be residual between the earning and normal consumption. Companies, also, are likely to save large portion of their short-period increased in net receipts. Thus, even if Gw is normally below Gn, it is likely to ride above Gn in the later stages of advance, and, if it so happens, a vicious spiral of depression is inevitable when full employment is reached. If Gw does not ride above Gn in the course of advance, there would be continued pressure to advance when full employment is reached; this would lead to inflation and consequently, sooner or later, to a rise of Gw above Gn, resulting ultimately into a vicious spiral of depression. Actually, G may be reduced before the employment is reached because of immobilities, frictions, and bottlenecks and, if it so happens, depression may come before full employment is reached. If Gw is far above Gn, G may never rise far above Gw during the revival and the depression may result long before full employment is reached.
 

==================================================================

Q.2      Discuss the concept of Golden Age Equilibrium in Joan Robinson’s Model. What are its main criticisms?

Ans      The situation of smooth steady growth with full employment arising out of the equality of the ‘desired’ and ‘possible’ rates of accumulation has been designated by Mrs. Robinson as the ‘golden age’ equilibrium.
Suppose Q is constant under the conditions of full employment, then from the equation K/N = Q, we get
                                    K = QN
                        : .      ΔK = ΔNQ
                        Or     ΔN = ΔK/Q
                        Or ΔN/N = ΔK/Q/N = ΔK/Q/K/Q   (.: N = K/Q)
                        Or ΔN/N = ΔK/K                                                                    -           (i)

Eqn (i) implies that if Q is constant at the full employment level, their labour and capital grow at the same rate. This is the situation of ‘golden age’ equilibrium. The equality between the desired and possible rates of accumulation coexists with full employment of labour and capital. Besides, both labour and capital grow at the same rate. The economy is thus on a tranquil steady growth path – “a steady rate of accumulation than rolls smoothly on its way”.

Stability of ‘Golden Age’ equilibrium: if certain forces operate so as to disturb the ‘golden age’ equilibrium of the economy, equilibrating mechanisms automatically comes into being to restore the equilibrium.

The divergence from the ‘golden age’ equilibrium path will take place if:

(a)                ΔN/N > Δ K/K
(b)               ΔN/N < ΔK/K

In case (a) the population will grow faster than the capital stock. This, signifies the situation of underemployment with the prevalence of surplus labour, money wage rates get depressed.
In case (b) the rate of population growth falls short of the growth rate of capital-stock.

Limping golden age.   Under this age, steady rate of accumulation coexists with unemployment.

Leaden Age.       It is a special case of a limping golden age in which the degree of unemployment is increasing due to inadequate rate of accumulation.

Restrained golden age.           This is an age of full employment but the desired rate of accumulation happens to exceed the possible rate determined by the rate of growth of labour force plus the rate of technological progress.

·         Bastard golden age.                It denotes a situation where unemployment prevails but the real wages remain rigid downwards.

Its main criticisms are as follows:-

·         Only the various forms of Growth Process.           This model provides only a frame work for studying the various forms of growth process. The different types of growth that have been analysed are left as isolated islands in her model.

·         Mrs Robinson studies that the prime variable of her model, viz. the rate of capital accumulation gets adjusted to the population growth via adjustments in wage rate, profit rate and labour productivity. This tantamount to suggest redistribution of income through relative factor prices, but it would be more practical and realistic to deploy fiscal and monetary measures for making adjustment in capital growth with population growth.

·         Neglects Role of State.          In her model state has been completely left out of picture. It is indeed unrealistic and precarious to rely solely on the private entrepreneurs for the achievement of a stable growth of the economy in tune with the requirements of a growing population and rapidly changing technology.

·         Wrong Assumption of constant technique. This model is carried out under the assumption of a given and constant technological horizon, but is unrealistic.

·         It neglect the institutional factors as social cultural and institutional changes, on which the development of the economy considerably depends.


==================================================================
Section - B

Q.3      Define any three of the following.

(c)                The Real Business Cycle Model

Ans      There are two types of proposition of the Real Business Cycle (RBC) model. First, it says that although we look at long term growth and short term fluctuations in economic activity separately, the same reasons that give rise to long term growth also cause fluctuations in economic activity. The RBC prefers ‘fluctuations’ to ‘cycles’. The RBC model attempts to explain business fluctuations and play down the role of monetary forces and believe that money is a veil. They insist that it is the real forces like production, supply shocks etc that actually lead to fluctuations. They emphasis on relative prices rather that the absolute price level, and believes that money is neutral as it lays stress on the supply side of the economy. The RBC theorists focus on productivity shocks as well as on the propagation of shocks to the rest of the economy. Productivity shocks can be of development of new techniques, new management practices, crop failure and supply shocks coming from outside the economy and so on.

The basic structure of a prototype Real Business Cycle model is to maximize the following type of utility function:

E  Here c and l denote the representative household’s consumption and leisure activities. 𝛽 is a discount factor that lies between 0 and 1. Leisure is time not devoted to labour. E is the operator showing mathematical expectation, conditional upon information at time t.

Each firms has access to a production technology of the type yt = zt f(ntd, ktd).  Here z is the realization of a random variable depicting technology. The other variables n and k denote labour and capital supplied during time t. The amount of labour supplied is 1-l where l is leisure. The budget constraint of the firms likes the following

ct + kt+1 = zt f(ntd, ktd) + (1-δ) kt - w(ntd- nt) - r(ktd, ktd)
Here superscript d denotes the amount demanded of the variable, w is the wage rate, and r is the rental for capital. The current consumption and the capital stock for the next period has a random component and is used to pay wages and rental for capital.



==================================================================

(d)               Tragedy of the commons

            Ans      The tragedy of the commons is a metaphor for the public goods problem that it is hard to coordinate and pay for public goods. The term comes from Hardin (1968). The commons is a pasture held by a group. Each individual owns sheep and has the incentive to put more and more sheep on the pasture to gain, privately. The overall affect of many individuals do this overwhelms the carrying capacity of the pasture and the sheep cannot all survive.

==================================================================
           
(e)                Vicious circle of poverty

Ans      A vicious circle of poverty implies a circular constellation of forces tending to act and react upon another in such a way as to keep a poor country in a “state of poverty”. Vicious circles are a set of interlocking equilibrium circumstances that reinforce each other. Three such vicious circles are as follows:-
(i)         In the underdeveloped countries, because of underdevelopment and backwardness, the total output is low and that after consumption needs are fulfilled, little remains as a surplus for capital accumulation. The capital deficiency leads to less investment and a resultant is low level of income.

(ii)        A low level of real income in economy presents little market opportunities for the entrepreneurs and little demand for investment.

(iii)       A third vicious circle encompasses underdeveloped resources and the backward people. Through illiteracy, lack of skills, deficient knowledge and factor mobility, the resources will remain unutilized, causing underdevelopment to perpetuate itself.

The outward movement of the underdeveloped countries has been rendered impossible because of the operation of vicious circle. If such an economy is to grow, it is necessary that concerned efforts may be made to break these vicious circles.

==================================================================
Q.4      Explain the concept and implications of globalization. Also, discuss its advantages and shortcomings.
Ans.     Globalization means to make global, that is worldwide, or effecting or taking into consideration the whole world or all people.
Globalization in its totality implies the following:
·         There is a spread of international trade.
·         People migrate from one country or region to another
·         Money or means of payment are exchanged on an increasing scale between countries or regions.
·         Capital flows from one country to another to help produce goods and services.
·         Finance-not necessarily linked to the production of goods and services – flows between different countries.
·         Traditional corporations arise which increasingly engage in the activities listed so far.
·         Technology is traded as between different countries.
·         Spread of print and electronic media.
·         Growing in trade and production of services of all kinds.

Advantages of Globalization are:
·         It helps improve the allocative efficiency of resources, reduce the capital output ratio and increase the labour productivity, help to develop the export spheres and the export culture, increase the inflow of capital and updated technology into the country, increase the degree of competition in the domestic economy, reduce the relative prices of industrial and manufactured goods, improve the terms of trade in agriculture and, in general, give a boost to the average growth rate of the economy in the years to come.
·         It helps to restructure the production and trade pattern in a capital-scarce labour abundant economy in favour of labour-intensive  goods and labour-intensive techniques.
·         With the entry of foreign competition, the aggregate gross and net investment proportions to GDP will go up.
·         Efficiency of banking and financial sectors will increase with the opening up of these areas of foreign capital and foreign banks.

Shortcomings of globalization are:
·         The speed at which capital moves across borders, the rapid evolution of management and marketing requirements, increase the pressure for structural and conceptual restructuring to a breaking point.
·         Globalization process is in essence a tremendous redistribution of economic power at the world level which will increasingly translate into a redistribution of political power.
·         In the globalization economics of the world are ironically moving away from one another more than coming together.
·         Globalization process challenges some familiar assumptions. Technological changes have eliminated more firms than they have created.

==================================================================

Q.5      Critically evaluate the theory of critical minimum effort. Also bring out its limitations.
Ans.     The theory of critical minimum effort is associated with the name of Harvey Leibenstein. The theory is based on the relationship between the three factors, viz. (i) per capital income, (ii) population growth, and (iii) investment. Leibenstein identified population as an income-depressing factor (or a ‘shock’), whereas investment is and income-generating (or a ‘stimulant’).  Growth in an economy is possible when the income-generating factors turnout to be more powerful than the income-depressing factors. A small additional investment may generate a small income. The additional income would be eaten up the additions to the populations which may come in the wake of the additional income, and hence the effort may fail to generals a cumulative process of growth. An initial large volume of investment may outweigh the growth of population problems. The theory is criticized on the following grounds:

(i)         Leibenstein assumes that population increases as the income rises above the subsistence level. Beyond a particular level of income, population declines. This assumption implies that rise in income has a direct bearing on the growth of population. But, in reality, this relation is not so simple. Growth of population is influenced by social attitudes, customs traditions of the people and not merely by the per capital income.

(ii)        The functional relation between per capital income and income growth rate is not as simple as assumes by Leibenstein. It is complex and has two stages. In the first state, the level of per capita income influences the rate of saving and investment which, in turn, depends on the pattern of income distribution and the effectiveness of financial institutions in mobilizing saving. In the second stage, the relation between investment and resultant output depends upon the economic and social system of the country. The relationship can be improved through innovations. The meaningful innovation is possible when updated technology, skilled labour and necessary infrastructure in the country. However, there are not available in the initial phase of development.

(iii)       In underdeveloped countries external forces play an important role in the initial stages of development. This theory does not explain clearly the role of external forces like foreign capital, foreign trade, international economic relations etc. These forces exert a vital impact on development and these factors play an important role in the development process.


==================================================================

Q.6      Explain the meaning of planning as an instrument of resource allocation. Why is there a need for planning in the development process?
Ans.     Planning can be defined as a consciously directed activity with predetermined goals and predetermined means to carry them out. It is an instrument or technique or mechanism whereby the use pattern of resources is carried out. Two basic elements of planning are (i) the goals and (ii) the means.

(i)         In a plan there may be one or more goals. In case there are many goals, they need to be placed in order of their importance to the economy.

(ii)        The means are broadly constituted of two elements: policies and instruments.
·         The policies describe the outlines of actions for the fulfillment of plan goals.

·         The instruments may be defined as the qualitatively and quantitatively defined means of action by which it is intended to achieve the plan goals. These instruments are the means by which planned resources are matched with planned requirements.

The various economic factors that make it imperative that economic planning be adopted as an instrument of resource allocation are as follows:

(i)         Since resources, whether natural, material, capital or human, are severely limited, planning provides a method of rational and considered choice for securing the optimum combination of inputs.

(ii)        Planning help to identify those deficiencies in the economy and the social structure which demand the largest attention.

(iii)       A plan for mobilizing resources and savings is a necessary counterpart of the scheme of investment.

(iv)       The processes associated with planning and the implementation of plans enlarge the scope for public participation and cooperation.

(v)        A role for government planning is thus called for to ensure that potential free-riders play their part.

(vi)       As planning techniques improve and more precise statistical data become available, the inter-relationship within the national economy can be seen more clearly and to that extent the effects of different policies and measures can be traced systematically.


==================================================================
Q.7      Differentiate between

            (a)        Embodied progress and Disembodied progress

Ans      Embodied or Disembodied is an attribute of the way technological progress affects productivity.

In any improvement in technology instantaneously affects the productivity of all factors of production, we say productivity improvements are disembodied.
Disembodies technical progress does not depend on the nature of machines or shape of technology but proceeds as though factors have just got augmented. Disembodied technology progress is exogenous.
           
If on the other hand, technical change is a property of only of new capital investment, we say technologies are embodied in the new equipment.
           
==================================================================
           
            (b)       Harrod neutrality and Hicks neutrality

Ans      A technological innovation is Harrod neutral if the technology is labour-augmenting.

            A technological innovation is Hicks neutral if the ratio of capital’s marginal product to labour’s marginal product is unchanged for a given capital to labour ratio.
==================================================================

            (c)        Capital augmenting and capital deepening.

Ans      If effectiveness is multiplied by capital K but not by labour L, then we say the effectiveness is capital-augmenting.

Capital deepening is an increase in capital intensity, measured by something analogous to the capital stock available per labour hour spent, or the amount of capital available for a worker to use, but this use is rare.

==================================================================

======================================================================================================================================================================================================

0 comments:

Post a Comment