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ECONOMIC TRENDS AND STRUCTURAL CHANGES

OUTLINE

INTRODUCTION ECONOMIC GROWTH Vs. ECONOMIC DEVELOPMENT ECONOMIC GROWTH (Trends) ECONOMIC DEVELOPMENT (Structural Changes) STAGES OF ECONOMIC GROWTH & DEVELOPMENT LONG RUN STRATEGY & POLICY ISSUES

AN INTRODUCTION TO ECONOMICS OF GROWTH & DEVELOPMENT

1. MEANING OF ECONOMIC GROWTH 2. MEANING OF ECONOMIC DEVELOPMENT 3. DISTINCTION BETWEEN GROWTH AND DEVELOPMENT 4. MEASURES OF ECONOMIC GROWTH 5. MEASURES OF ECONOMIC DEVELOPMENT

ECONOMIC GROWTH
DEFINED AS RATE OF EXPANSION WHICH MOVES UNDERDEVELOPED COUNTRY TO HIGHER LEVELS IN A SHORT PERIOD OF TIME

ECONOMIC DEVELOPMENT
GROWTH

+
PROGRESSIVE CHANGES IN CRUCIAL VARIABLES

WHICH DETERMINE THE WELL BEING OF THE PEOPLE

TWO APPROACHES TO THE CONCEPT OF ECONOMIC DEVELOPMENT


TRADITIONAL APPROACH DEVELOPMENT MEANS INCREASE IN GNP BIAS TOWARDS INDUSTRIALIASATION AT THE COST OF AGRICULTURE ERADICATION OF POVERTY FOCUS ON INDUSTRY & AGRICULTURE EMPLOYMENT REDEFINED APPROACH IMPROVEMENTS
IN

MATERIAL WELFARE

DISTINCTION BETWEEN GROWTH AND DEVELOPMENT

ECONOMIC GROWTH REFERS TO

ECONOMIC DEVELOPMENT IMPLIES

INCREASE IN OUTPUT OF GOODS AND SERVICES

CHANGE IN SOCIO-ECONOMIC STRUCTURE OF A COUNTRY

MEASURES OF ECONOMIC GROWTH

1. RISE IN GNP OR GDP

2. RISE IN PER CAPITA PRODUCT

MEASURES OF ECONOMIC DEVELOPMENT

1. COMPOSIE INDEX OF DEVELOPMENT

1. CHANGE IN QUALITY OF LIFE

INTRODUCTION

ECONOMIC ENVIRONMENT

Institutional Framework Economic Policy Statement Economic Plan Documents Economic Controls& Regulations Define the role of & status of: Private sector Public sector Multinationals Co-

Physical Framework Income Price Employment Output Investments Trade Labour supply

TRENDS

STRUCTURAL CHANGES

Define long term perspective

Outline the dynamics underlying the economy

A knowledge of these help the business firms to plan out corporate strategy and policy to cope with short run and long run challenges of business environment

The Process

Computing, collecting, and analyzing data

Picture of major economic trends & structural changes in the economy

Enable us to make a quantitative assessment of the economic environment of business

To outline strategies policies and responsibilities

ECONOMIC GROWTH (Trends)

Economic growth is defined as a sustained and substantial rise in product per capita. Accordingly: (i) Economic growth is an upward trend (ii) It is an upward trend in per capita income (iii) The upward trend has to be significantly large and sustained over a long period

Economic growth is a relative concept. It makes sense only in the context of comparisons, both intertemporal and international INTERTEMPORAL COMPARISION Evaluation of economy over time Level of national income at the beginning & end of the plan Using time series data INTERNATIONALC OMPARISON Evaluation of one economy with another It is comparison over space

Using cross-section data

ECONOMIC DEVELOPMENT (Structural Changes)

As a concept, Economic Development is much broader than Economic Growth As and when the economies grow in terms of total and per capita income levels, certain structural changes accompany the process of growth. SO Trends in income Structural changes

Together Constitute Economic Development

Upward trend in per capita real income Rise in product per worker

Inventions are adopted and spread from one line of activity to another

Change in science & technology

Changes in production function of the economy

Inventions give shape to innovations Innovations of new idea, new process, new product,new market

Need for changes in production & productivity

Technological advancement

Societys wants & preferences

Economic Development (Structural Changes) Change in the structure of national output Change in factor proportion Change in structure of occupations Change in the structure of capital formation Change in the structure of consumption Change in the structure of foreign trade

Change in structure of productivity

Change in the structure of national output As economy grows Labour productivity increases in both sectors Labour productivity in manufacturing, mining & services sector

Level of national income changes

Composition of national income changes

Reflects positive income elasticity of demand for non agricultural output

Contribution of Agriculture to GDP declines

Contribution Industry & services to GDP increases

Change in factor proportion Increase in output per worker in both sectors Capital-labour ratio of different sectors shows significant changes Increase in mechanization & capital intensity Change in factor proportions is the outcome of technology progress With increase in productivity income grows Expenditure on industrial goods & material services increases Percentage expenditure on food declines

Mechanization may be extensively used more in in nonagriculture than in agriculture so labour productivity growth in secondary & tertiary sectors may be faster than primary sector

The demand of non-food to food consumption increases. It is this change in the structure of demand which lies at the root of change in structure of output

Change in structure of occupations Economic growth is associated with change in structure of occupations Level of per capita income grows up Percentage contribution of primary sector declines Percentage contribution of secondary & tertiary sectors increases

Percentage distribution of labour force changes

The shift in occupational pattern runs parallel to shift in output pattern because the same factor, positive income elasticity of demand for non- primary goods & services, underlies the process of economic growth

Change in structure of productivity As an economy experiences changes in structure of output and occupation simultaneously there comes the Change in structure of productivity instantaneously Flight of labour from agriculture Proportion of nonagriculture to agriculture output changes

Change in the structure of output per labour

Skill formation Rapid capital formation Better management

Change in the structure of capital formation A Change in the structure of capital formationis another develoment during the process of economic growth. With industrialization & consequent urbanization Structure of industries changes Producer goods industries grow in importance
Initial stages capital requirement is high.capital-output ratio is high As the economy progresses the capital base becomes strong productivity of other factors is high the output coefficient shows an increase

Consumer goods industries decline in importance The ratio of fixed Investment in Human capital, investment to working Infrastructure, Construction, capital increases Foreign capital

Change in the structure of consumption The upward trend in per capita income directly brings about a Change in the structure of consumption

---- Income changes ---- Change in the pattern of income distribution ---- Change in relative price structure ---- Change in terms of trade between agriculture & nonagriculture Interaction of these factors cause change in structure of consumption, standard of living Reflecting change in social values, beliefs & preferences

Change in the structure of foreign trade With changes in the structure of employment, production, distribution and consumption there comes naturally Change in the structure of foreign trade During development Import of metals & machineries for modernization Financed through export surplus of agricultural goods & traditional items As economy grows Export of manufactured goods & intermediaries Various trading & commercial organizations assist trade transactions
The structure of money & capital market also changes in line with requirements of changing composition of foreign trade & payments

STAGES OF ECONOMIC GROWTH & DEVELOPMENT

According to Rostow there are five stages of economic growth (i) The traditional society (ii) Preconditions for take off (iii) The take off (iv) The drive to maturity (v) The age of high mass consumption

The traditional society

Preconditions for take off

1. It is a low level equilibrium economy 2. The social structure is hierarchical 3. Value system is geared to long run fatalism 4. Low output per head because of backward technology Non-economic changes 1. Felt need for economic modernization 2. Mobilization of savings 3. Undertaking innovational risks Economic changes 1. Rise in rate of capital accumulation above the rate of population growth 2. Exploitation of existing innovational opportunities & creation of new ones 3. Training labour for specialized large scale

Crucial stage Resistance to steady growth is overcome Growth becomes a normal condition Growth process becomes institutionalized in the society It involves the following stages (Rostow) 1. The rate of net investment rises from 5 per cent or less to 10 per cent of national income 2. One or more new, substantial and rapidly growing manufacturing industries arise

The take off (20 years)

During this period The drive to maturity (40 years) . Modern technology spreads beyond the leading sectors . It has the technological & entrepreneurial skill to produce anything it chooses toleading sectors shift towards The produce production of durable consumer goods & services Income rises to levels where basic food, shelter & clothing are no longer the main consumption objectives The economy allocates resources to social

The age of high mass consumption

LONG RUN STRATEGY & POLICY ISSUES

DEVELOPMENTAL POLICY
.Large scale investment programmes .Simultaneous investment in different lines .Balanced growth .Capital and profit interdependence among different investment projects .External economies .Particular industries & sectors in which massive investment efforts will pay high dividends .Minimizes the need for investment resources . Need for a development plan

All Out

GENERAL APPROACH

Selective

Agriculture

Industry

. Provides maximum employment . Max contribution . Productivity is low .Needs reforms, supply of inputs, credit, transport, techniques etc. .Industry expansion required for growth .Industry growth to be stimulated by: 1. Import substitution 2. Industrial mix & commercial policies .Government intervention in transportation, communication, irrigation, public health, education etc. .Efficient production in these sectors can contribute substantially to development of the entire economy

SECTORAL

Social Capital