ECONOMIC PLANNING AND STRATEGY

Economic Growth and Development

Economic Strategy

Economic Planning

ECONOMIC GROWTH• An increase in the capacity of an

economy to produce goods and services, compared from one period of time to another.

• Occurs whenever people take resources and rearrange them in ways that make them more valuable

ASPECTS OF ECONOMIC GROWTH

• Standard of living

• Government spending

• Domestic problems

• Global role models

ECONOMIC DEVELOPMENT• A process that influences growth and

restructuring of an economy to enhance the economic well-being of a community

• Long-term, multidimensional, rational process involving the reorganization and reorientation off entire economic and social system

ECONOMIC PLANNING

• A branch of planning in which a nation decides in advance what to be done for the purpose of stability and development of economy

COMMON CHARACTERISTICS OF DEVELOPING NATIONS

• Low levels of living

• Low levels of productivity

• High rates of population growth and dependency burden

• High and rising levels of unemployment and underemployment

• Significant dependence on agricultural production and primary products

• Dominance, dependence, and vulnerability in international relations

MEASURES OF DEVELOPMENT

• The most popular indicators of economic development are per capita gross National Product (GNP) or per capita Gross Domestic Product (GDP)

OTHER INDICATORS OF DEVELOPMENT

• Physical Quality of Life Index (PQLI)

An attempt to measure the quality of life or well-being of a country. The value is the average of three statistics: basic literacy rate, infant mortality, and life expectancy all equally weighted on a 0 to 100 scale

• Human Development Index (HDI)

Combines the normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries

• Capability Poverty Measure (CPM)

Considers three objectives of development:: to be nourished and healthy, to be capable of safe and healthy reproduction

• Economic Freedom Index

Uses ten criteria: trade, taxation, government intervention, monetary policy, foreign investment, banking, wage and price, property rights, regulation, and black market activities

THEORIES ON ECONOMIC GROWTH

JEAN BAPTISTE SAY

Supply creates its own demand

ADAM SMITH• An Inquiry into the Nature and Causes of the Wealth of

Nations

• Believed in the Natural Law

• Natural Law dictates natural Liberty

Natural Liberty

is a system where anybody can do what he/she wants to be or anybody can pursue what he wants to pursue within the bound set by society or the natural legal system

• The system of natural liberty is associated with the invisible hand

• The free market economy

• The system of natural liberty promotes self-liberty

ADAM SMITH• Self-interest promotes exchange

A. More exchange means more goods

1.Market will expand

2.Income will increase

Increase in income will increase demand thereby will expand further the market

a.Division of labor will happen

b.Specialization will happen

c.It will increase productivity

d.It will result into economic growth (more income, more output)

e.More income, more goods

f.The process will go on and on again

ADAM SMITH

B. Increase in income means increase in savings

1. Increase in savings will lead to capital accumulation

2. Capital accumulation will expand the market and economic growth

POLICY INSIGHTS FROM THE IDEAS OF ADAM SMITH

• There is a need to increase income by increasing labor productivity and capitalization in the production process.

• There is a need to increase savings by encouraging the activities of manufacturers and merchants.

THOMAS MALTHUS

• The power of population is indefinitely greater than the power in the earth to produce subsistence for man

MALTHUSIAN ANALYSIS• Economic growth will result in a

situation where the demand for labor is greater than the supply of labor

• Wages will go up

• Standard of living will go up

• Number of marriages will increase

• Population will increase

PROBLEMS

1. Population Explosion

2. Food Shortage

3. Collective or Mass Misery

SOLUTIONS

1. Positive and preventive check

2. Technical Innovation in agriculture

3. More Equitable Distribution of Income

MALTHUSIAN ANALYSIS

DAVID RICARDO

• Principles of Political Economy and Taxation

• Wishes to explain how economic growth will stop

RICARDIAN PRINCIPLE• Ld > Ls

• Wage increase

• Standard of living will increase

• Number of marriage will increase

• Population will increase

• Food demand will increase

• Population pressure in land

• Motivate farmers to use good land (intramarginal land)

• Use up all good land

• Use of bad land (marginal land)

EFFECTS OF THE USE OF MARGINAL LAND

• Price of food will increase relative to industrial and manufacturing products

price of food is determined by the marginal cost of producing

marginal cost of producing food in bad or marginal land is high

price of food must therefore be high

• If the marginal cost is high, then the price of food must be high

• Workers in the industrial will demand higher wages

• Profit of capitalists will decrease

• Profit squeeze (Profit=0)

• Economic growth will stop

KARL MARX• Law of Capital Accumulation

The desire of capitalists to accumulate more and more capital

• Law of increasing Centralization and Concentration of Capital

As capitalism grows and advances, the competition among firms will increase

• Law of the Falling Tendency of the Rate of Profit

As capitalism grows and advances, the rate of profit of the capitalist will fall and will cause the capitalist system to breakdown

• Law of Increasing Pauperization

Capitalism will meet a violent end

JOSEPH SCHUMPETER• Popularized the term creative destruction

• Economic Growth = Investment

• Investment = Capital accumulation/Innovation

• Economic Growth = Capital accumulation/innovation

• Innovation

Doing things differently in order to improve productivity

Make use of the old, but do things differently

• Major Source of Innovation

Entrepreneur

SCHUMPETERIAN ANALYSIS• Economic growth depends on investment

• Innovation is a form of investment

• Economic growth depends on innovation

• Since the major source of innovation is the entrepreneur, economic growth therefore, depends on entrepreneurship

WHAT DETERMINES THE SUPPLY OF ENTREPRENEUR?

• Entrepreneurs depend on the social climate

Social Climate

social, political, socio-psychological atmosphere within which an entrepreneur must operate

Elements of Social Climate

Social Values

Class Structure

Attitude of society towards business success

PROCESS OF ECONOMIC DEVELOPMENT

• Innovation in the production method

• Innovation on products

• Innovation in markets

• Innovation in industrial organization

JOHN MAYNARD KEYNES

• General Theory of Employment, Interest and Money

• Father of Macroeconomics

KEYNESIAN ANALYSIS• A central idea is that when the amount of money being saved

exceeds the amount being invested, then unemployment will rise

• This is in part a result of people not spending too high a proportion of what employers pay out, making it difficult, on aggregate, for employers to make a profit

• In a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment

• Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibria

• Activist economic policy by government to stimulate demand in times of high unemployment