1.
a) Using Harrod-Domer growth model show how the rate of growth of GDP is determined jointly by
the net national savings ratio, s, and the national output capital ratio, c?
Todaro Book, Page 118-120
1. b) Assuming no depreciation, if the growth rate of GDP is 8% and Capital-Output ratio is 4%, then
what will be the savings rate of the economy?
According to Harrod-Domer model the growth equation is given by,
S
δY =
r
Where,
δY is the growth rate of income.
S is the saving rate; and
r is the capital-output ratio.
Substituting the given values, we can find,
S
8 %=
4%
⇒ S=32 %
2. a) According to the Lewis two-sector model, use a properly labeled labor supply-and-demand diagram
in the manufacturing sector to illustrate and briefly explain:
a) Why the labor supply curve SLM is horizontal at WM when the number of workers hired in the
manufacturing sector is less than the surplus labor in the agricultural sector L?
b) How the profits in the manufacturing sector is being maximized and distributed between the
employers and the workers;
c) Why the development of the manufacturing sector creates a win-win-win situation for the
economy, employers, and workers;
d) How the employment in the manufacturing sector expands if employers re-invest all their profits
into labor-neutral capital stock.
Solution:
In Lewis's two-sector model, when surplus labor in agriculture is fully utilized, the labor supply curve in
the industrial sector will be Slope upward.
In this model, surplus labor from the agricultural sector moves to the industrial sector, leading to an
initial flat portion of the labor supply curve in the industrial sector. As the industrial sector absorbs more
labor, wages rise, causing the labor supply curve to slope upward. This reflects the increasing
opportunity cost of labor as more workers move from agriculture to industry.
b) Define marginal productivity of labor in Manufacturing sector, MP LM? Explain how quantity of labor
in manufacturing sector is identified using MPLM as labor demand and WM as labor supply.
The marginal product of labor (MPL) is defined as the additional output produced as a result of
employing one more unit of labor, while keeping other inputs constant. It quantifies the change in total
output that results from a change in the quantity of labor employed.
Mathematically, it can be expressed as:
∆Q
MPL=
∆L
Where,
- ΔQ is the change in total output (quantity produced),
- ΔL is the change in the quantity of labor (number of workers).
The MPL is an important concept in economics, particularly in the context of production theory, as it
helps firms understand the productivity of labor and make decisions regarding hiring. It typically
diminishes as more labor is added, a phenomenon known as diminishing marginal returns.
3. a) Define development economics. Why the view of development economics differ from traditional
economics and political economics.
Development economics is a branch of economics that focuses on improving the economic, social, and
institutional conditions of developing countries. Development economics differs from traditional
economics and political economy in its focus, scope, and methods.
Development economics
Considers the economic, social, political, and institutional factors that contribute to
development
Focuses on improving the standard of living of the poor and downtrodden
Considers factors like healthcare, education, and equality levels
Considers how to transform economies into modern, high-income countries
Considers how to address economic issues arising from imperfect markets
Considers how to address political and social levels of culture and traditions.
Traditional economics
Focuses on output production, irrespective of human development
Considers only the GDP or GNP to determine total production levels in an economy.
Political economy
Considers the relationship between politics and economics
Emphasizes the role of power in economic decision making.
Development economics is a complex and varied field because the cultural, social, and economic
frameworks of every nation is different.
3. b) Explain three core values of development.
The three core values of development are sustenance, self-esteem, and freedom. These values are
interconnected and reinforce each other.
Sustenance
The ability to meet basic needs like food, water, shelter, and healthcare
The ability to keep an individual alive.
Self-esteem
Feeling valued and having agency through opportunities and participation
Having a sense of self-worth or self-respect.
Freedom
Having the right to make life choices without exploitation
Freedom from servitude and poverty.
These values were identified by Denis Goulet in 1971. His analysis can be viewed as a precursor to the
work of the Human Development Index and Amartya Sen.
3. c) What are the major features of Sen’s capabilities approach?
Amartya Sen's capabilities approach is a framework for evaluating well-being, quality of life, and social
justice. It emphasizes the importance of freedom and capabilities in achieving justice.
Features of the capabilities approach
Freedom: The freedom to achieve well-being is of primary moral importance.
Capabilities: Capabilities are the set of functioning’s that a person can achieve.
Functioning’s: Functioning’s are the different activities that a person can perform.
Development: Development is an increase in the freedom that citizens have to choose among
development options.
Economic development: Human development is central to creating a meaningful measure of
economic development.
Justice: The theory of justice emphasizes the importance of enhancing individuals' capabilities to
lead the lives they value.
Agency: The approach highlights the significance of agency in achieving justice.
Purpose of the capabilities approach
The capabilities approach was originally formulated to broaden our understanding of economics and
development. It was a reaction to the utilitarian and resource-based model that had focused entirely on
income growth.
