Answer to Question #266057 in Microeconomics for DAVIES MBALAKAWE

Question

a) Planning is said to be more than just the formulation of quantitative economic targets. It is often described as a process. What is meant by the planning process, and what are some of its basic characteristics? In your discussion, be sure to explain and comment on some of the major arguments or rationales, both economic and noneconomic, for planning in developing economies. b) Economic growth is said to be a necessary but not sufficient condition to eradicate absolute poverty and reduce inequality. What is the reasoning behind this argument? c) Discuss the Solow neoclassical model of economic growth in details and show its importance to the study of economics of development.

Answer 1

(a)

Planning process refers to the definition of a company's goals and the determination of the resources necessary to achieve those goals. It involves the steps taken by a company to develop budgets to guide its future activities.

characteristics:

• Planning is goal oriented- it is meant to achieve the desired objective. Involves the identification of the action that would result in desired goals faster and economically.
• Planning is an intellectual process- the process involves creative thinking and sound judgement. One can only make sound plans if he has sound judgement, foresight and also imagination.
• Planning involves choice and decision-making. The best alternative should be chosen depending upon requirements and resources of the enterprise.
• Planning is the primary function of management- it acts as a guide for organization, staffing, directing and control.
• Planning is designed for efficiency- it results in the accomplishment of objectives at the minimum possible cost.

In developing economies, there exists scarce information about the economy. Planning in this case has provided a platform to acquire and analyse the necessary data so as to achieve a better understanding of the functioning of the economy. For instance, development planning helps in the alleviation of poverty through the creation of employment opportunities and social needs such as education and healthcare.

(b)

Economic growth is a necessary but not sufficient condition to eradicate poverty and inequality. This is because wealth and income in an economy are unevenly distributed. Income level does not take into account the distribution of wealth. Economic growth is an essential aspect for an economy but it cannot by its own serve for economic development. It requires administrative and political will in order to bring structural, technical and institutional changes to achieve sustainable growth to bring economic development.

Neoclassical growth model

This is an economic model of growth that outlines how a steady economic growth rate results when three forces: labor, capital and technology come into play. The theory argues that technological change significantly influences the overall functioning of an economy. It claims that Capital accumulation in an economy and how people make use of it, is important for determining economic growth.

The production function in this model is stated as:

$Y=AF(K,L)$

Y- income

K- capital

L- labor

A- level of technology.

Importance to economics of development:

• It is characterized by increased steady-state per capita level of income.
• Long term growth rate of economy is solely determined by technological progress or regress.
• Growth rate of output is in a steady state equilibrium.