Circular Flow Model


A simple economic model illustrating the flow of goods and services though the economy. In the model, producers are termed as "firms" while consumers are referred to as "households." Firms supply goods and services while households consume these goods and services. Factors of production (land, labor, capital) are supplied by the household to firms and the firms convert these into finished products for household consumption.

  

        ECONOMIC GROWTH MODELS
Neoclassical growth model


An economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labor, capital and technology. The theory states that by varying the amounts of labor and capital in the production function, an equilibrium state can be accomplished. When a new technology becomes available, the labor and capital need to be adjusted to maintain growth equilibrium.

Rostow's stages of growth

A model by W.W Rostow that postulates that economic growth occurs in five basic stages, of varying length which are :
  1. Traditional society
  2. Preconditions for take-off
  3. Take-off
  4. Drive to maturity
  5. Age of High mass consumption
  • Traditional society
    • characterized by subsistence agriculture or hunting & gathering; almost wholly a "primary" sector economy
    • limited technology;
    • A static or 'rigid' society: lack of class or individual economic mobility, with stability prioritized and change seen negatively
  • Pre-conditions to "take-off"
    • external demand for raw materials initiates economic change;
    • development of more productive, commercial agriculture & cash crops not consumed by producers and/or largely exported
    • widespread and enhanced investment in changes to the physical environment to expand production (i.e. irrigation, canals, ports)
    • increasing spread of technology & advances in existing technologies
    • changing social structure, with previous social equilibrium now in flux
    • individual social mobility begins
    • development of national identity and shared economic interests
  • Take off
    • manufacturing begins to rationalize and scale increases in a few leading industries, as goods are made both for export and domestic consumption
    • the "secondary" (goods-producing) sector expands and ratio of secondary vs. primary sectors in the economy shifts quickly towards secondary
    • textiles & apparel are usually the first "take-off" industry, as happened in Great Britain's classic "Industrial Revolution"
  • Drive to maturity
    • diversification of the industrial base; multiple industries expand & new ones take root quickly
    • manufacturing shifts from investment-driven (capital goods) towards consumer durables & domestic consumption
    • rapid development of transportation infrastructure
    • large-scale investment in social infrastructure (schools, universities, hospitals, etc.)
  • Age of mass consumption
    • the industrial base dominates the economy; the primary sector is of greatly diminished weight in economy & society
    • widespread and normative consumption of high-value consumer goods (e.g. automobiles)
    • consumers typically (if not universally), have disposable income, beyond all basic needs, for additional goods
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