Balanced Growth: Introduction, Vicious Circle of Poverty and Indivisibilities

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Introduction

  • Major obstacle to economic growth and development – Vicious cycle of poverty.
  • All sectors should grow simultaneously and proportionately so that consumption, investment and income also grow at the same rates, i.e.. .
  • Large scale expansion of all activities.

Vicious Circle of Poverty

Vicious Circle of Poverty
  • Definition - “Set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention.”
  • Low income low savings low investment less production.
  • Low production low income low demand for goods, resulting in smaller markets (limited extent of markets) .
  • Due to low demand, no inducement to invest (because of low purchasing power)
  • Low purchasing power due to low real income
  • Low real income due to low productivity
  • Low productivity due to insufficient capital
  • To break the vicious circle of poverty, a balance between demand and supply has to be restored.

Indivisibilities

On Demand Side

Problem of limited (small) extent of market

On Demand Side

On Supply Side

Problem of low capital formation

Low-Income ⇾ Low Savings ⇾ Low Investment ⇾ Low Capital ⇾ Formation ⇾ Low Productivity ⇾ Low Income.

How to Break Vicious Circle

  • Complementary Demand
  • Government Intervention
  • External economies
  • Balanced growth

Essential Conditions

  • State intervention
  • Formulation and implementation of plans
  • Coordination among different sectors
  • Public cooperation

MCQs

Q 1 – The theory of Balanced Growth was given by:

a) M. Friedman

b) Ragnar Nurkse

c) Thomas R. Malthus

d) John Stuart Mill

Ans – b) Ragnar Nurkse

Q 2 – The vicious circle of poverty states that –

a) Excess government assistance in welfare programs causes problems in the economy

b) Low income levels create pressure for cheaper imports

c) Low income levels create pressure for money creation in low income groups

d) Low per capita income leads to low savings and low investment causing low production which causes low income

Ans – d) Low per capita income leads to low savings and low investment causing low production which causes low income

Q 3 – Which of the following about Balanced Growth theory is correct?

a) All sectors in UDCs are independent

b) There should be a balance between growth in developed and underdeveloped countries

c) All sectors should grow simultaneously

d) None of the above

Ans - c) All sectors should grow simultaneously

Q 4 – Which of the following is NOT essential for balanced growth?

a) No intervention by the state

b) Coordination among different sectors

c) Public cooperation

d) State intervention

Ans – a) No intervention by the state

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