Theory Of Balanced Growth Pdf

ADVERTISEMENTS: (c) Lewis (A) Views of Rosenstein Rodan: In 1943 article, Rosenstein Rodan propounded this theory but without using the term balanced growth. He stated that the Social Marginal Product (SMP) of an investment is different from its Private Marginal Product (PMP). If different industries are planned accordingly to their SMP, the growth of the economy would be much more than it the industries had been planned according to their PMP. SMP is greater than PMP because of the complementarity of different industries which leads to the most profitable investment from the social point of view.

He illustrates it with a popular example to shoe factory. If a large shoe factory is started in the region where 20,000 unemployed workers are employed. Now in case, the workers spend their entire wages on shoes, it would create market for shoes. If series of industries are started, in that case the demand of different industries would increase via multiplier process.

The theory of 'Balanced Growth' has been put forward as a solution to the problem of vicious circle of poverty that afflicts the demand side of capital formation. The theory of 'Balanced Growth' has been put forward as a solution to the problem of vicious circle of poverty that afflicts the demand side of capital formation.

This would lead to planned industrialization. Ragnar Nurkse has also developed his thesis on these lines. ADVERTISEMENTS: (B) Views of Ragnar Nurkse: Prof. Nurkse has given a proper explanation of the theory of balanced growth.

He holds that the major obstacle to the development of the underdeveloped countries is the vicious circle of poverty. This vicious circle of poverty shows that income in underdeveloped countries is low. Low income leads to low savings. Vauxhall Trip Computer Activation on this page. Low savings will naturally result in low investment, which will result in less production.

Low production will generate low income. Low income will create low demand for goods. In other words, it will result in smaller markets (limited extent of markets). Thus, there will be no inducement to invest. According to Nurkse “The inducement to invest may be low because of the small buying power of the people, which is due to their small real income, which again is due to low productivity.

The low level of productivity however is a result of the small amount of capital used in production which in turn may be caused, at last partly, by inducement to invest.” So, in order to break the vicious circle of poverty in the under-developed countries, it is essential to have a balance between demand and supply. Ranger Nurkse is of the view that economic development is adversely affected by vicious circle of poverty.

The economic development can take place only if vicious circle of poverty is broken. The vicious circle of poverty operates both on the demand and supply side. (a) Demand Side: Vicious circle of poverty affects the demand side of capital formation. The underdeveloped countries are poor because their level of income is low. Due to low level of income, their demand for low income goods is low.

Vicious circle of poverty: On Demand Side: In UDCs the size of the market is limited. As a result, private investors do not get opportunities for more investment.

This reduces investment and capita. Hence productivity of capital would fall. This reduced per capita income as explained as follows. ADVERTISEMENTS: Low Income → Low Size of Market → Low Investment → Low Productivity → Low Income. (b) Supply Side: Vicious circle of poverty affects the supply side of capital formation. In the underdeveloped countries, poverty exists because the per capita income of the people is low. Due to low per capita income, the level of saving is low.

Since investment depends on savings, so investment would be low due to which capital formation would be low. Low capital formation would lead to low productivity which would result in poverty. This is how vicious circle from supply side completes. Low-Income → Low Savings → Low Investment → Low Capital → Formation → Low Productivity → Low Income Vicious Circle of Poverty: Supply Side: The underdeveloped countries, can resort to capital formation and accelerate the pace of economic development only by breaking the vicious circle of poverty. Once the vicious circle of poverty is broken, the economy would be on the rails to development. Now the question is how to break the vicious circle of poverty. How to Break Vicious Circle of Poverty?

(i) Complementary Demand: The vicious circle of poverty cannot be broken with industrial investment decisions. This means vicious circle of poverty cannot be broken only by making investment in one industry or one sector. Rather, there should be overall investment in all the sectors. This is the only way to enlarge the size of the market. In order to clear his views, Nurkse has given example of shoe industry as given by Rosenstein Rodan. It testifies that investment in shoe industry will not lead to sufficient demand. What we need is to have overall investment, so that labourers of one industry can be the consumers or buyers of the products of others.