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Important notes of BBA

Updated on October 11, 2013

Kathmandu University


Important notes of BBA

UNIT 3: Leading Theories in ED

3.1: Evolution of ED Theories:

A. Many countries of Asia, Africa, & the Caribbean sought ED, having achieved poli- tical independence in the late 1940s.

B. Countries/Regions considered “rude and barbarous” in the 18th century. “backward” in the 19th century, and “underdeveloped” during the prewar period were renamed with “less developed countries”, or the “poor countries”, or the “emerging countries”, or the “developing countries”

C. The issue: How to achieve ED? Achieving ED is not that easy. It calls for understanding the forces of development and designing appropriate policies to support the development forces was (is) essential.

D. Development meant different things to different economists at different times:

The 1950s and the early 1960s: The maximization of growth of GNP through capital accumulation and industrialization based on import substitution.

The late 1960s and the early 1970s: Focus more directly on poverty & inequality, growth of GNP not a sufficient condition for the removal of poverty, increased income not trickling down, and number of poor increasing (vehement criticism- R. McNamara).

The W-Redistribution with growth.

The ILO- Basic needs approach of ED

Economists shifting their focus from physical capital to human resources.

The 1970s & the 1980s: Substantial change in the concept of ED, inappropriate economic policies-the basic reason for countries becoming poor & the people suffering from widespread poverty. imperfect mkt., state interventions need to be done away with.

E. Rostow Stages of Growth:

Influenced as above, came the stages-of-growth model of development (1960-The Stages of Growth-W. W Rostow). Walt W. Rostow-the American economic historian sought a historical approach to analyze the process of ED. Development in terms of a series of steps:

1. The Traditional Society:

· Limited production functions based on per-Newtonian science and technology, per-Newtonian attitudes towards life

· A ceiling existed on the level attainable Q per head because of old tools and techniques.

· Political power with landed aristocracy.

· Agriculture- the mainstay for both the state and the people.

· No inventions, innovations.

· No commerce, no business, except the barter economy

2. The Pr-conditions for Take off:

· The scope of commerce, external/external, widens

· Modern manufacturing enterprises appear.

· A build-up of social overhead capital (transport) for enlarging MKT. size, to exploit the natural resources & to allow the state rule effectively.

· A technological revolution in agriculture to increase agricultural productivity to meet the requirements of increased population.

· Expansion of imports, including capital, financed by efficient production & marketing of natural resources for exports.

3. The Take-off:

· This stage is the great watershed in a society’s life for growth in this stage becomes a normal phenomenon.

· A stage of industrial revolution, tied directly to radical changes in the methods of production even during a relatively short period of time.

· It lasts short, about two decades

· A rise in the rate of investment from 5% or < to over 10% of NI or net national product.

· The development of one, or more substantial manufacturing sectors with a high rate of growth.

· Such sectors introduce expansion of Q in other sectors through technological transformation.

· The quick emergence of a political, social and institutional framework that expands the economy into the modern sector.

4. The Drive to Maturity:

· The stage when a society would have effectively applied the modern technology for a long-sustained economic growth

· It lasts well over four decades.

· New production technologies replace the old ones.

· New leading sectors come one after the others.

· Rate of investment goes well high over 10% of NI.

· The economy is capable of withstanding any unexpected shocks.

· Labor force becomes skilled, real wages start rising, workers organize themselves to have greater economic and social security.

· The society becomes fed-up of the miracles of industrialization and wants something new leading to a further change.

5. The Age of High Mass Consumption:

· Excessive migration of people from rural to urban areas.

· The extensive use of automobiles, the durable consumers’ goods and household gadgets.

· Concerns do shift from supply to demand, from production to consumption

· National policies to enhance power and influence beyond national frontiers.

· Increased concern to have a welfare state by focusing more on equitable income distribution through progressive taxation, increased social security, and more leisure to the working force.

· Emergence of new and leading commercial centers like cheap automobiles, petrochemicals, steel, electrical equipment, and computers.


· Are the stages inevitable like birth & death? Do they follow a set of sequence like childhood, adolescence, maturity and old stage?

· Can anyone tell with sufficient precision that one stage is complete $ the other has begun?

· A number of nations including USA, Canada, New Zealand & Australia were born free of traditional societies.

· Development in agriculture takes place even in the take-off stage. The take-off in New Zealand & Denmark is attributed to agricultural development.

F. Lewis Theory of Structural Transformation:

· It focuses on transforming the traditional subsistence agriculture into a more modern, urbanized, and industrially diverse manufacturing and service-led economy.

· Formulated by W. Arthur Lewis, a Nobel laureate, in the mid-1950s and later modified by John Fei and Gustav Ranis.

· It is a two-sector model and was considered the general theory of development in most of the surplus-labor third world economies during most of the 1960s and early 1970s.

· The two sectors—a traditional, overpopulated, rural subsistence sector characterized by zero marginal labor productivity, and a high-productivity modern, urban industrial sector which could productively absorb the surplus labor from the rural sector.

· The primary focus of the model is labor transfer to and the growth of Q & employment in the modern sector.

· Assumptions—capitalists reinvest all their profits, wages remain constant (but at least 30% higher than that in rural areas to induce workers to migrate from their home areas), surplus labor in the rural sector in that MP of labor in agriculture sector is zero, all rural workers share equally in the Q so that the rural wage is determined by the average & not the MP of labor.


A. Kuznets’s Six Characteristics of Modern Economic Growth (MEG):

Professor Simon Kuznets is a Nobel laureate in economics (1971) for his pioneering work in measuring & analyzing the process of historic growth of NIs in developed nations. He defined a country’s economic growth in terms of:

  • A long-term rise in capacity to supply increasingly diverse economic goods to its population.
  • Such an increased capacity should result from advanced technology.
  • Institutional, attitudinal & ideological adjustments matching the advanced technology.

In his elaborative analysis, Kuznets has listed down six characteristic features in the growth process of most developed nations:

  1. High rates of growth of PC Q:
  • For industrialized countries, annual Q growth rate: 3%, annual pop. Growth rate: 1%, & PC Q growth rate: 2%.
  • These rates imply doubling of PC Q in every 36 yrs., every 72 yrs., & Q (nations’ output) in every 24 yrs.
  1. High rates of increase in total factor productivity(TFP):

· What is TFP rise? The rise in Q / units of all inputs. The WB (The East Asian Miracle, 1993) confirmed Kuznets’s finding that TFP growth really determines the rate of growth in developing/developed countries.

· What is TFP? It shows the efficiency with which all inputs are used in a production function. Increase in TFP causes PPF to shift upward, ceteris paribus. Other studies done show that increase in TFP accounted for about (50-75) % increase in PC Q in the countries studied.

  1. High rates of Economic Structural Transformation:
  • A high rate of structural & sectoral change inherent in the growth process.
  • Gradual shift from agriculture to non agricultural activities, from industry to service (1990s on).
  • Average size of productive units from family/personal- owned enterprises to the huge national/multinational corporations.
  • Locational & occupational status of the labor force shifting from rural, agricultural & related non agricultural activities toward urban-oriented manufacturing and service pursuits(Example: 97%, 200yrs, 200 yrs. Before; 53.5% in 1870, & 7% in 1960; Belgium: 51% in 1846; 12.5% in 1947 & 7% in 197o).
  1. High Rates of Social, Political, & Ideological Transformation:

· Transformation in attitudes, institutions, & ideologies.

· Social transformations in terms of general urbanization process & adoption of modern ideals, attitudes, & institutions. Gunar Myrdal (Asian Drama, 1968) talks of some modernization ideals: rationality (modern methods of thinking), economic planning, social &economic equalization (equality in status, opportunities, etc.) & improved institutions & attitudes.

5. International Economic Outreach:

· It relates to the historical & ongoing propensity of rich countries to reach out to the rest of the world for primary products, raw materials, cheap labor, & mkts. for their manufacturing products.

· Such outreach activities have become possible by adoption of modern technology (transport & communication).

· This has unified the globe together with opening the possibilities for political & economic dominance of poor nations by the powerful neighbors.

6. Limited International Spread of Economic Growth:

· There has been enormous increase in world Q over the past, but confined to only very few of the world pop.

· There has been unequal international power relationship between DCs & LDCs widening the gap between rich & poor people/countries.

· Jeffrey G. Williamson (Globalization & Inequality: Past & Present, 1997) holds a view that the further economic growth of rich people/countries is sometimes achieved at the cost of the growth of poor people/countries.

The above characteristics are interrelated & reinforcing. For example: High rates of PC Q results from increasingly growing factor productivity.

B. The Growth Controversy:

· The 1970s witnessed a remarkable change in the perceptions in terms of the nature of economic activities. People lost their faith in growth pursuit, for they thought it could not be the principal economic objective.

· The major emphasis in the DCs. shifted toward more concern for the quality of life. There was disappointment for the industrial growth-brought disaster resulting in: the pollution of air & water; the depletion of natural resources; & the destruction of many scenic wonders.

· A book, “The Limits to Growth”, by name was published under the auspices of the Club of Rome in 1972. It cautioned that the earth’s limited resources may not sustain a continuation of high growth rates without major economic & social catastrophes.

· The main concern in the poor countries remained the question of growth vs. income distribution. They understood that development requires higher GNP & a faster growth rate. But the basic issue was (and is) not only how to make GNP grow, but also who would make it grow. It was because rapid economic growth alone failed to eliminate/reduce widespread absolute poverty.

· In both the worlds, the call for the dethronement of GNP as the major objective of economic activity was widely heard. The concern became the problems of poverty & inequality during the entire 1970s.

· Slogans such as “A society that is not socially just & does not intend to be puts its own future in danger” & “The unfinished business of the 21st century is the eradication of poverty” echoed again & again.

C. Relationship Between Economic Growth, Income Distribution & Poverty:

· What do we measure when we speak of income distribution (ID)? Economists distinguish between two measures of ID: The personal, or size distribution of income, & the functional, or factor share distribution of income.

The 1st deals with individuals /HHs & the total income (TI) they receive either way (Example: Two people receive the same PI & are put equal no matter what. One may work 16 hrs. a day as a computer engineer & the other just collects interest on his/her inheritance).

· Total pop. is divided into distinct groups/size. The common practice is to divide into quintiles (five), or deciles (ten) equal groups in ascending/descending income order. Another method in analyzing PI statistics is to construct the Lorenz Curve (LC), named after Conard Lorenz, an American statistician who in 1905 devised this to show the relationship between different pop. groups, & their respective income shares. The LC diagram showing ID pattern follows:

· Gary S. Fields (Poverty, Inequality, & Development, 1980) talked how LCs can be used to analyze three limiting cases of dualistic development along the lines of the Lewis model. He talks of a three-growth types:

· The modern- sector enlargement growth in which the two-sector economy develops with same wages in both sectors resulting rise in incomes & reduction in absolute poverty (Japan, SK, Taiwan). It is difficult to tell about changes in inequality.

· The modern- sector enrichment growth in which the economy grows being confined to a limited people in modern sector alone with wages & no. of workers held constant in the traditional sector resulting further inequality (Latin American/ African economies). This causes the LC shift downward & away from the LOE.

· The traditional-sector enrichment growth in which most benefits of growth are equally shared by traditional-sector workers with little/no growth taking place in the modern sector (Maoist China, other socialist economies). This causes the LC shift uniformly upward & closer to the LOE.

A final tool for measuring the relative degree of income inequality is the Gini Coefficient (GC) formulated by an Italian statistician Corrado Gini in 1913 & named after him. It measures aggregate inequality & varies from 0(perfect equality) to 1(perfect inequality). It is suspected to lie between o.5o-0.7o for highly unequal ID countries & 0.20-0.35 for relatively equitable ID countries. It is 0.43 for urban Nepal & 0.66 in the central region of Nepal. Diagram for GC measurement follows:

· GC=shaded area A/Total area A+B.

The 2nd deals with the functional /factor share distribution of income & explains the share of total NI that each of the factors of production receives in a mkt. economy. It is because the proceeds from a mkt. economy are distributed to the owners of economy’s factors of production. In American economy, 70.8% of the NI goes as labor income, & the rest to other factors of production. How? Diagram follows:

Example(C): 1990s data with some 15 countries as sample (table 5.2): The poorest 20% of the pop. receiving only 5.2% of the income, the richest 10% & 20% receiving 36% &51.8%, respectively. In a developed country like Japan, the poorest 20% receive 8.7% of the income while the richest 10% & 20% get only 22.4% 37.5% respectively.

Level of PCI & inequality (table 5.3): Take the case of Sri Lanka & Brazil: The former has one-sixth the PCI of the later, yet Sri Lanka’s three inequality measures are less pronounced than that of Brazil. The three inequality measures include:

· The total share of income received by the poorest 40% of the pop.,

· The ratio of the share going to the richest 20% as against the poorest 20%, &

· The Gini coefficient.

D. Rural Poverty, Women & Poverty, Ethnic minorities & Poverty:

1. Rural Poverty: Some of the most valid generalizations about the poor are:

  • They are disproportionately located in rural areas,
  • They are primarily engaged in agricultural & associated activities,
  • They are more likely to be women & children than adult males, &
  • They are often concentrated among minority ethnic groups & indigenous people.

About 80%-90% of all target poverty groups are located in the rural areas in Africa & Asia. Amidst such rural concentration of poverty, most LDC govt. expenditures over the past has been directed toward the urban concentration & more so toward the relatively affluent modern manufacturing & commercial sectors.

The poor in villages die in hospitals that lack drugs, antimalarial bed nets, and safe drinking water. They die namelessly, without public comment, & such stories rarely get written.

The urban sector bias in govt. expenditures is at the core of many of the development problems. Any policy designed to alleviate poverty must necessarily be directed toward rural development in, general & the agricultural sector, in particular.

2. Women & Poverty: Women constitute majority of the world’s poor. They

suffer both as poor & as women. They have less access to resources, education, & other productive resources than their male counterparts.

Women perform 86% of domestic & 57% of agricultural activities in Nepal (Benet & Acharya, 1979). Their contribution to the HHs income remains 50% as opposed to only 44% for males & 6% for children aged up to 14 yrs.Yet they suffer in terms of access to opportunities & services.

There is a large earning gap between men & women, for women are often paid less for performing similar jobs. They are barred from high-paying occupations. As GNP PC is not an adequate measure of development, so is the HH income in measuring the HH individual welfare, for ID within HHs may remain quite unequal.

In most poor countries, girls are 4 times as likely to suffer from acute malnutrition & boys are 40 times more likely to be taken to hospitals when ill. Studies have shown that such gender-biases have reduced the rate of survival among female infants.

In Europe & North America women tend to outnumber men. The ratio of female to male exceeds 1.05 in the UK, France & the USA. But it is 0.95 for Egypt, 0.94 for Bangladesh, China & west Asia, 0.93 for India, &0.90 for Pakistan. Amartya Sen (Missing Women, 1992) viewed that there were more than 200 million women missing alone in China,

Development policies widening productivity gap between men & women also worsen earning disparities & further erode women’s economic status within HHs.In fact, the welfare of women & children can be greatly enhanced by designing development policies that focus integrating women into development programs. Mainstreaming women into economic activities is a must for improving the living conditions of the poor.

3. Ethnic Minorities, Indigenous pops. & Poverty:

· Third world poverty falls heavily also on minority ethnic groups & indigenous pops. There are sizeable ethnic pops. facing serious economic, political & social discrimination. Domestic conflicts & civil wars take place in many countries out of ethnic group’s perceptions that they are losing out in the competition for limited resources.

· Most indigenous people live in extreme poverty. % of pop. below poverty line in Bolivia is 64.3 for indigenous 48.1 for non indigenous people; for Mexico it is 80.6% for indigenous & 17.9% for non indigenous people; & in Peru 79% for indigenous & 49% for non indigenous people. Whether they are Kurd (Iraq), Tamils (Sri Lanka), Muslims (India), or Tibetans (China), their poverty plight is serious.

E. Redistribution From Growth:

· Dev. Goals need redefined with a heavy focus on improved ID. The shift should be from maximization of GNP growth to broader social objectives of reducing poverty & excess income disparities. Dev. Strategy relates not only to accelerated Eco. Growth but also that growth raises the standards of living of the poor who are largely bypassed in the past.

· The principal Dev. Objective should be to generate a desired pattern of overall & broad-based income growth with special emphasis on the growth benefiting the poor.

Some economists in the past championed unequal IDs. The lead role did come from Walter Galenson & Harvey Leibenstein (Investment Criteria, Productivity, & Economic Dev., 1955). They believed that unequal IDs would generate rapid Eco. Growth. How? High personal corporate incomes increase savings which, in turn, increase investment & Eco. Growth. It is because the rich save & invest while the poor spend all their incomes on C. Is it true? JM Keynes &his psychological law.

But there have been counterarguments against what is argued above. The beliefs tell that greater equality in developing countries may generate self-sustaining Eco. Growth (Thorsten Person &Guido Tabellini: Is inequality Harmful for Growth? 1994) because of the following reasons:

· Inequality & widespread poverty create conditions not having access to credit, unable to finance for children’s education, have many children as a source of old age security. These factors cause PCI to be less than what it would be if there was great equality.

· The empirical evidences show that the rich elites spend much of their incomes on imported luxuries, seek safe havens abroad for their savings leading to capital flight. These do not add to the nation’s productive resources. No savings & investments take place in the local economy.

· Low incomes & low levels of living for the poor manifested in poor health, nutrition & education can lower their productivity ultimately resulting in a slow-growing economy.

· Raising the income of the poor will stimulate the overall increase in the demand for locally produced products leading to increase in local production, local employment & local investment which, in turn, pave the way to rapid economic growth at home.

· A more equitable ID achieved through the reduction of mass poverty stimulates healthy eco expansion by acting as a powerful material & psychological incentive to plural economic participation.

What is learn from above is that promoting rapid economic growth & reducing poverty & inequality are not mutually conflicting rather mutually supportive. The WB (WDR, 1990) reached a similar conclusion.

Areas of Intervention (E) & Policy Options:

Where should developing economies focus that aim at reducing poverty & inequality? Four broad areas for interventions follow:

· Functional Distribution.

· Size Distribution.

· Progressive Taxation at the upper levels, &

· More/ Heavy public expenditures for benefiting the lower level people.

Policy Options:

1. Removal of Factor Price Distortions:

· Because of institutional constraints & flawed govt. policies, the price of labor is higher than what it would have been. The trade unions put pressure to raise minimum wages to artificially even amidst widespread unemployment (Price distortions). Reduction of wages—substitution of labor for capital—increase in employment opportunities leading to increase in incomes of the poor.

· It is again found that cost of capital is institutionally set at artificially low levels in the name of investment incentive (below what mkt. forces would dictate) through various public policies: tax allowances, subsidized interest rates, & low tariffs on capital goods imports. The price of capital hardly rises to its scarcity level.

· Factor prices function as ultimate signals & incentives in any economy. Correcting these prices (lowering labor price & raising the price of capital) would not only increase productivity & efficiency but would also reduce inequality by providing more wage-paying jobs for currently unemployed/underemployed workers.

· Removal of factor price distortions helps in combining efficiently generated growth with higher employment, less poverty, & greater equality.

2. Correction of The Size Distribution through Progressive Redistribute Measures:

· One of the major causes of unequal ID in the third-world countries is the unequal & highly concentrated patterns of asset/wealth ownership. Why the richest 20% of their pop. receives well over 50% of their NI? It is because that 20% probably owns & controls more than 90% of the productive & financial resources (not only physical capital but also financial & human capital in the form of better education).

· Correcting factor prices alone does not reduce income inequalities & widespread poverty amidst highly concentrated physical & financial asset ownership & education (Nancy Birdsall & Juan Luis London, Asset inequality Matters: An Assessment of the WB approach to poverty Reduction, 1997). Similar views are also held by Edward N. Wolff (Recent Trends in the Size Distribution of HH Wealth, 1998).

· Relevant policies aiming at reducing poverty & inequality focus directly on reducing the concentrated control of assets, the unequal distribution of power, & the unequal access to educational & income-earning opportunities characterizing LDCs.

3. Reduction of The Size Distribution at the upper level through Progressive income/wealth Tax:

  • Economies aiming at improving the economic fate of the poor, the bottom 40% of the pop. should have adequate financial resources to transform their aims into reality. The major source of such Dev. finance is the direct & progressive taxation both on income & wealth. But progressive taxation on paper turns out to be regressive ones.
  • How? Indirect taxation on retail purchases hits hard to the lower & middle-income groups. On the other hand, the rich derive the largest part of their incomes from the return on physical & financial assets which go mostly unreported. The rich have the power & ability to avoid paying taxes without fear of govt. reprisal.
  • But progressive direct taxation on income & wealth especially at upper levels is what mostly needed for redistribution.
  1. Enhancement of the Size Distribution at lower levels through direct TPs & provision of public goods/services:
  • The direct provision of tax-financed public consumption goods—public health projects, school lunches & preschool nutritional supplementation programs etc.
  • Direct money transfers & subsidized food programs for the rural/urban poor & govt. policies of decreasing the price of essential foodstuffs-consumption subsidies.
  • All as above, including others directly affect in raising the real incomes of the poor.

F. Problem of Unemployment/underemployment, Poverty, & ID:

· Nelson Mandela—despite the welcome growth of GNP, very few jobs have been created. In fact, there has been shrinkage of opportunities.

· Eco. Dev. of Western Europe & North America was characterized by continuous transfer of Eco. activities & people from rural to urban areas, leading to urban industrial expansion & creation of employment opportunities therein. And over the same period, laborsaving technological progress in agri. Reduced rural labor needs. This is how the western nations went a systematic rural- to-urban transfer of their human resources.

· The above experience tells that Eco. Dev. in the third-world ,too, necessitates concentrated efforts to promote rapid urban industrial growth. It is for this that economists view cities as growth centers.

· But unlike in those western nations, today’s developing economies are plagued by unique combination of massive rural-to-urban pop. influx, stagnated agricultural productivity, & growing urban-rural unemployment/ underemployment.

· Unemployment has been affecting 10% to 20% labor force in most of the poor economies; its incidence is much higher among the young & educated within 15-24 age brackets.

· Unemployment affects the poor heavily, for they happen to be the ones that are unemployed.

· The cost of unemployment—lost production—social pie becoming smaller-the cost of lost Q- a recession may cost 3-5% of GDP- okun law. Dudley Seers concern.

· Unemployment/underemployment problems in Nepal—ARTEP, 1974(workers in Nepal employed 55days in the hills & 180 days in the terai—NPC survey report, 1978(the av. % of utilized labor days is 63.01 for Nepal with as much as 63.54% in rural areas &45.78% in urban areas).

Dimensions of Unemployment Problem:

The unemployment problem in poor economies is mostly seen in the following areas:

1. Education & unemployment.

2. Women & unemployment.

3. Youth unemployment & child labor, &

4. Self-employment (formal sector unemployment).

Education & unemployment:

· Unexpected – ve relationship between levels of education & rates of unemployment in developing economies—in India in 1989, the unemployment rate was 2% for people with no education, & 9% & 12% for people with a secondary education & for university graduates respectively. Most countries do face such problems.

Women & unemployment:

· The end of 1990s witnessed women’s participation in LDC labor mkt-43% in East Asia, 32% in Latin America, & 13% in the Arab world.

· But most women were employed in low-productivity jobs with long working hrs. & low wage levels.

· Most women worked either in agriculture (78% in Africa & 80% in Asia) or in the urban informal sector (20%- 40% in Latin America). Women in Nepal?

· Women are routinely discriminated against in terms of wages, job advancement & job security. In terms of hrs. worked per week, their working hrs. range in between 48-57 as against 46-53 for their male counterparts (Table:7.5: 1990s for 5 developing countries).

Youth unemployment & Child Labor:

· Unemployment problem in most poor economies falls heavily with the people aged between 15-24 yrs of age. Youth unemployment affects both educated & uneducated, women, & men. Researchers suspect the youth unemployment rate to be over 30% in most poor countries. Another problem is of child labor.


· People in most poor countries do not find formal sector wage-employment which forces them to pursue self-employment in the informal/traditional sector both in rural & urban areas.

· Much larger % of LDC labor forces remain engaged in self-employment activities as against workers in developed economies.

· The interesting thing to note is that self-employed working forces in DCs are involved in small businesses (sole proprietors, limited partners, or professionals such as lawyers, doctors, & accountants, etc.) as against the working forces in LDCs where most of them work as street vendors, hawkers, small shop owners, rickshaw pullers, etc. They just earn for their day-to-day survival & are therefore poor.

Linkage between unemployment, ID & poverty:

· David Turnham (Employment & development: A New Review of Evidence, 1993) made a study of 5 Latin American countries. What he found was that 47% -65% of unemployed were concentrated in the bottom 40%of the ID scale, the unemployment rates among the bottom 40% being 3-4 times higher than that at the top 40%(Brazil, Colombia, Costa Rica, Panama, & Venezuela).

· It would be wrong to assume that jobless people are necessarily poor & full-time working people are relatively better off, for there could be voluntarily unemployed workers.

· Notwithstanding this, one of the major interventions for reducing & inequality in LDCs is to create adequate gainful employment opportunities particularly for the poor. It should be the essential element in any poverty-focused development strategy.

F. Rural-urban Gap:

· The conflict in today’s poor countries of the world is not between labor & capital, nor between foreign & national interests. It is between the rural classes & urban classes. The rural sector contains most of the poverty while the urban sector goes with most of the affluence. The urban classes have won most of the battles with the countryside making the development process slow & unfair.

· Scarce land that could produce foods for hungry villagers produce costly calories from meat & milk for the urban rich; scarce investment , instead of going on irrigation projects goes on urban motorways; scarce human skills do not design village wells & agricultural extension services, but showpiece stadiums for world boxing championship.

· Resource allocations reflect urban priorities rather than equity or efficiency. M. Lipton (Why Poor People Stay Poor?, 1977) holds a view that the impact on Q of $1of carefully selected investment in most poor countries is 2-3 times higher in agriculture than elsewhere. Yet public policies & private mkt.powers stand together to push domestic savings & foreign aid into non agricultural uses.

· The gap has been increased also by town’s success in buying most of the rural elites. Most of the costs have gone to the rural poor, benefits being cornered by the urban rich

Urban-bias Govt. policies Enhancing Rural-urban Disparities:

· Allocation of public expenditures &Taxation,

· Measures that raise the price of industrial products relative to farm products, encouraging private rural savings to flow into industrial investment,

· Educational facilities encouraging bright villagers to go to cities for urban jobs,

· Govt. policies influencing (rural-urban terms of trade) the Q & input prices for agriculture & the Q & input prices for the urban industrial sector,

· Rural-urban-partnership-programmer failing to focus on what urban sector could gain for its development from rural sector,

Policy Options:

· The key to ending extreme poverty, at the most basic level is to enable the poorest of the poor to get their foot on the ladder of development. The development ladder hovers overhead, & the poorest of the poor are stuck beneath it. The poor in the villages lack the minimum amount of capital necessary to get a foothold.

· The poor lack: human capital, business capital, infrastructural capital, natural capital, public institutional capital, & knowledge capital.

· Resource allocations & planning: who participates? who decides? & who benefits? (planning from top has always been planning for top)

G. Impact of Environmental Pollution on Development:

· Given level of GDP in any economy at any point of time neither counts all “goods” nor all the “bads”produced in it. The bads relate to the environmental damage caused from economic growth.

· Remember the book: the limits to growth,

· The air & water pollution resulting from chemical production, energy production & use of automobiles.

· Acid rain caused from long-distance transportation of sulfur emissions from power plants,

· Radioactive exposure from atmospheric tests of nuclear weapons,

· Accidents like at the Ukrainian plant in Chernobyl,

· Depletion of the ozone layer from the buildup of CFC,

The above are the unintentional but harmful side effects of economic activities. The issue of global warming from the greenhouse effect is serious & is (from the accumulation of gases like CO2) largely produced by the combustion of fossil fuels. If the current trend of climatic change/global warming continues, the earth may warm 4-8 Degree Fahrenheit over the next century.(Remember the relationship between nature & economic growth process).

  • The task of saving the Earth’s environment must & will become the central organizing principle of the post-cold-war world (Albert Gore).
  • Curbing externalizes is the concern of environmental economists (not all externalities).
  • Programmes for correction: Direct controls (the 1970 Clean Air Act in USA). In 1977, utilities were asked to reduce sulfur emissions at new plants by 90%. Firms are mostly asked to phase out ozone-depleting chemicals. The other is mkt. solution relating to charging emission fees.

Kathmandu University

School of Management

Bachelor of Business Administration



Course Code : ECO 210 Credit Hours: 3 (Three)


Course Objective:

This course is designed to provide exposure to the basic concepts, tools and theories of macroeconomics with the intention of enabling in identifying and analysing fundamental national and international macroeconomic issues useful to business management decision-making.

Course Contents:

1. Basic Concepts (4 hrs.)

· What Macroeconomics is

· Basic Economic Problems Issue: Resource Scarcity and Efficiency

· Macroeconomics' objectives: growth, employment and price stability

· Opportunity cost

· Stocks and Flows

· Society's Technological Possibility

· Economic Organisations: Market, Command, Mixed Economies (Market and Government)

· Black or Underground Economy

· Economic Models

· Equilibrium and Disequilibrium

· Resources/ inputs and outputs/value added

· Business cycle

2. Measuring National Economic Activity (6 hrs.)

· The Concept of National Accounts

· The Essence of Economic Flows: Sectors of the Economy: Household, Firm/Enterprise, Government, Financial, Foreign/External

· Circular Flow of Macroeconomic Activity/Nation Income: Flow-of-Product (Final Goods) and Earnings or Cost/Expenditure Approaches

· Gross Domestic Product (GDP) and Gross National Product (GNP) and Capital Consumption/Depreciation

· Nominal and Real GDP, and GDP Deflator

· Actual and Potential/Full Employment GDP/Output

· Disposable Income and Saving

· National Income Aggregates: Components of GDP and GNP

3. Consumption and Investment (6 hrs.)

3.1 Consumption

· Budgetary Expenditure Patterns

· Consumption, Income and Saving

· The Consumption Function

· The Savings Function

· The Marginal Propensity to Consume

· The Marginal Propensity to Save

· National Consumption Behaviour

· Determinants of Consumption

· The National Consumption Function

· The Multiplier Model

3.2 Investment

· Constituents of Investment

· Determinants of Investment

· The Investment Demand Curve

· The Accelerator Principle

4. Aggregate Demand and Supply (5 hrs.)

· Concepts of Aggregate Demand and Aggregate Supply, and their Schedules

· Output and Employment Determination

· Demand side (Level of aggregate demand) and Supply side (Productivity and production costs) Economics.

5. Money and Banking (6 hrs.)

· Definition and Functions of Money

· Banking System and the Economy

· Credit Creation by Commercial Banks

· Financial Intermediaries (depository and non-depository institutions)

6. Monetary Policy and its Management (3 hrs.)

· The Concept of Money Supply: Narrow and Broad Money Supplies

· Central Banking

· Objectives and Instruments of Monetary Policy (including exchange rate policy)

· Targeting Money Supply

· Managing Money Supply: use of instrument to manage money supply

7. Inflation Unemployment and underemployment (5 hrs.)

· Concepts of Inflation, unemployment and underemployment

· Consumer Price Index, (CPI) and Wholesale Price Index (WPI)

· Inflation Targeting

· Inflation and Unemployment Trade-off

8. Business/Trade Cycle (4 hrs.)

· The Concept of the Business Cycle

· Business Cycle Theories

· Business Cycles and Business Decision making

9. Public Finance (6 hrs.)

· The concept of Public Finance

· The Role of Government in the Economy

· Government Budgeting

· Fiscal Policy: Objectives and Instruments

· Taxation Policy and Investment Decisions

· Fiscal – Monetary Mix

· Deficit Financing

· Government or Public Debt Management

10. International Trade and Balance of Payments (5 hrs)

· Gains from International Trade

· Comparative Advantage and Protectionism

· The Concept of Balance of Payments and Major (BOP) Components (Trade and Current Accounts and Capital Accounts)

· Implications of Imbalances in Trade, Current and Capital Account

· The Concept of Globalisation

· International Financial Institution: The IMF, The World Bank, The Asian Development Bank (ADB/Manila)

· Foreign Direct Investment


Lipsey, Richard G. and K. Alec Crystal, Principles of Economics, 9th Edition, 1999, Noida, India: Oxford University Press.


Samulelson, Paul A and Willian D. Nordhaus, Economics, 16th Edition, 1998, New Delhi: Tatal McGraw-Hill.


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