The model of economic growth which has been constructed by
J.E. Meade describes
those conditions which will be helpful for a sustainable economic growth in the
presence of constant technical progress and a constant increase in population of a
country. According to Meade along with economic growth:
(i) The production of capital equipments increases because savings are made
out of current incomes.
(ii) The ratio of working force increases.
(iii) Because of technical progress it is possible to produce goods and
services in the presence of fixed resources.
(i) There is a closed economy having no financial and trade links with other
(ii) 'Laisseze Fair' economy where govt. neither imposes taxes, nor makes
(iii) There exists perfect competition in goods and factor markets.
(iv) Constant returns to scale exist.
(v) The machines constitute the capital goods and all machines are alike.
(vi) The ratio of labor to machines can easily be changed in short run and long
(vii) The production of consumer goods and capital goods is substitutable.
(viii) A certain proportion of machines becomes prey to depreciation. Therefore,
there rises the need for replacement of machines.
The production function in Meade's model is as:
Y = f (K, L, N, t)
Y = Net production of the economy.
K = Stock of machines.
L = Amount of labor.
N = Land or productive resources.
t = State of technology which goes on to change along with
change in time.
According to Meade the
production of the economy can increase if:
(i) The stock of capital goods (K) increases in the economy. The increase in
capital stock will increase the savings of the people leading to increase the
real capital accumulation in the economy. The increase in stock of capital is
represented by ΔK. If we represent the value of marginal product of machine by
"V", the increase in the output of the economy will be represented as: VΔK.
(ii) The working force of the economy (L) increases which is represented by
If we accord W as the value of marginal product of labor then the increase in
production of the economy will be represented as: WΔL.
(iii) Even no change occurs in capital, labor and natural resources the
production of the economy can change due to technical progress which is shown by
Thus the increase in the production of the economy can be represented as:
ΔY = VΔK + WΔL + ΔY/
Dividing this equation by basic factors of production of the economy shown in
production function. In other words, by dividing ΔY/s equation by Y/s equation:
ΔY//Y = VK/Y . ΔK/K + WL/Y . ΔL/L + ΔY//Y
Here ΔY/Y shows annual rate of growth of income of the economy. While
ΔK/K shows the annual rate of growth of stock of capital. ΔL/L represents the annual
rate of growth of labor and ΔY//Y means the annual rate of growth of income due
to technical progress.
We use the symbols like y, k, l and r to represent such
propornate rates of
growth. The term VK/Y shows the proportion of capital in total output while WL/Y shows the
relative share of labor in total production of the economy. Out of VK/Y a certain percentage
of national income is accrued to the owners of the capital in the form of net profits which is
shown by 'U'. While a certain proportion of national income which is accrued to
labor in the form of wages is shown by 'Q'. Therefore, in the light of these
symbols the national income equation is written as:
y = Uk + Ql + r
According to this equation the total output of the economy (y) is summation
of three outputs:
(i) Uk [the product of rate of capital growth (k) and proportion of profits
(ii) Ql [the product of rate of labor growth (l) and proportion of wages (Q)].
(iii) The growth of technical progress (r).
Subtracting (l) from the both sides
of above equation:
y = Uk + Ql + r
y - l = Uk - l + Ql + r
y - l = Uk - l (1 - Q) + r
Where y - l shows the difference in between growth rate of production and
growth rate of labor force. Thus it shows the growth of per capita income. The
above equation shows that y - l can be increased with Uk and r. Whereas y - l
decreases with l (1 - Q).
Now we introduce savings in this equation. The Uk is presented in some other
way. As we assumed that all of savings are invested. Therefore, the increase in
the amount of capital (ΔK) will be equal to the savings made out of national
income (SY). It is as:
ΔK = SY where SY = annual savings
Dividing both sides by K.
ΔK/K = SY/K
As Uk = VK/Y . ΔK/K putting SY/K
in place of ΔK/K, then:
Uk = VK/Y . SY/K or UK = Vs
Putting the value VS in place of Uk in the above equation:
y - l = Vs - l (1 - Q) + r
Changes in Growth
After analyzing the determinants of growth rate of income we discuss those
conditions whereby growth rate of the economy will increase or decrease. As
Meade assumed the constancy of growth rate of population (l) and growth
rate of technology (r), then the changes in y - l would
be depending upon the behavior of s, V and Q.
As no change occurs in population and technology and savings increase
the amount of capital. But in this way, the MPK will come down. Thus because of
increase in savings there will be a slower increase in the production. In such
state of affairs the 'Vs' will decrease. If technical progress takes place such
negative effect on V will be offset. It means that if with the passage of time
the changes in 'r' occur it will have an effect on V. It is so because
that the productivity of all factors will increase because of 'r' leading to
increase savings. Moreover, the savings in an economy also depend upon
distribution of income. If the share of profits in national income distribution
increases the savings will increase.
and Economic Growth:
The technical progress can be measured with those effects which occur on the
MPs of different factors. The nature of technical progress can be labor saving as
well as labor intensive. If technical progress leads to labor saving the MPL
which is shown by Q = WL/Y will increase. If because of technological change the
use of labor increases the MPL = Q = WL/Y will decrease. The technical progress which leads to increase the use of
machinery the MPK = U = VK/Y will increase. While because of technological change
which is labor intensive
the U will decrease.
The above discussion shows that the
rate of economic growth of an economy (y) is determined by the rate of capital
accumulation (VS) and technical progress (r), population remaining the same. It
y = VS + r
If r remains constant the economic
development will entirely depend upon Vs. It is shown by the figure/diagram.
Here the curve OG1 represents that level of output which can be produced with
the help of a specific amount of capital in a year. If we employ OL of machinery
the level of output is LR. If amount of machinery is increased to OM, the
production will rise to ME. As the slope of the curve OG1 has gone down at E as
compared with the point R. This shows that here the MPK
has gone down. If we take the next year the new curve OG2 comes into being
because of technical growth. As in the second year the technical progress has taken place, then
with the same capital (OL), the LD output is being produced, which is more than
earlier. Again, with OM capital in the presence of technical growth, the MF output is being
produced. All this means that technical change may have the effect of boosting
Conditions of Steady
If the level of technical progress remains same and population increases at
some particular rate, then the steady economic growth requires the fulfillment of
(i) The nature of technical progress should be neutral for all the factors of
(ii) The elasticities of substitution between factors of production are equal
(iii) The ratio of wages, profits and rent remains the same.
According to first and second condition the. proportion of profits in NI (U),
the proportion of wages in NI, (Q) and proportion of rent in NI (Z), all
remain same when the economy is passing through the process of economic growth.
In this connection, Meade introduces new symbols. They are as:
The Sv shows the
savings out of profits; the Sw the savings out of wages and Sg represents the
savings out of rent. Thus the savings of the economy are as:
S = SvU + SwQ + SsZ
We rewrite the basic equation:
y = Uk + Ql +
As U, Q, l and r remain constant, then the production depends upon capital
(K). If amount of capital remains fixed the production will remain constant. As
growth of capital is equal to SY/K where SY represents that annual increase in capital which
became possible due to savings. As we assumed above that
's' remains constant. Hence SY/K would
remain constant if Y/K remains constant. This would happen if K and Y grow at
the same rate.
Thus according to Meade the equilibrium growth rate of the economy depends
upon growth rate of capital accumulation. Meade says that there exists a
critical rate of growth of capital accumulation where growth rate of income and
growth rate of capital would be equal. Now we introduce such critical growth of
capital accumulation (a) in the model.
a = Ua + Ql + r
or a - Ua = Ql + r
a (1 - U) = Ql + r
or a = Ql + r/(1 - U)
At such critical growth rate of capital accumulation (a), the y = k, where
growth rate of
income will remain constant. Therefore, if the growth rate of
capital accumulation is Ql + r/(1-U), the rate of increase in production will also be
[Ql + r/(1 - U)] and here the conditions of steady growth will be met. If SY/K >
Ql + r/(1-U) which means that growth rate of
capital accumulation will be more than its counter part critical rate. In such situation, the MPK
and profits will decrease leading to reduce the savings. In this way, the SY/K will
fall till it reaches the
critical level Ql + r/(1-U). If at any time
SY/K < Ql + r/(1-U), this shows
that income will grow more than increase in capital leading to increase the
savings till it reaches the critical level Ql + r/(1-U).
All this shows that Ql + r/(1-U) is a condition to maintain the steady economic
growth which Meade calls "Critical Rate of Growth".
Evaluation of the
The Meade's model tells that economic development is based upon growth of
population, capital accumulation and technical progress. It means that the model
presents the determinants of steady growth in a better way. But this model is
close to classical model when it also assumes perfect competition and constant
returns to scale. But this model fails to entertain the social and sociological
effects in the growth process. Therefore, it is hardly applicable in case of
UDCs where the social and sociological obstacles hinder economic growth.
The neo-classical model of economic growth is a reaction against
model of economic growth which states that the ratio of capital to labor remains
fixed. Hence there are reduced chances of equality between warranted growth rate
and natural growth rate. Whereas the neo-classical economists dismiss the
assumption of constancy of capital-labor ratio. They are of the view that both
labor and capital are substitutable. The neo-classical model also portrays the
process of economic growth, but it is better than H-D model, because it reaches
a stable equuilibrium level whereas it was not the case with H-D model. Still
this model suffers from following drawbacks, according to Prof. A.K. Sen.
(i) The neo-classical model tries to create equality between GW and Gn, but
fails to create an equality between G and GW.
(ii) In neo-classical model we do not find the existence of investment
function. If it is introduced, the results will be different.
(iii) In this model the prices of factors have been assumed flexible, but such
assumption may serve an obstacle in the way of economic development.
(iv) The assumptions of the model like perfect competition and constant returns
to scale may not be true in practical life.
(v) The neo-classical model assumes technical progress as an exogenous factor.
Therefore it ignores investment in research, and capital accumulation for
Meade Model and UDCs:
So many economists are of the view that neo-classical model does not apply in
case of UDCs. In this respect, they give following arguments.
(i) In UDCs the well defined production function is non-existing.
(ii) The marginal productivity theory loses its efficacy in UDCs where the
concept of family labor prevails, rather wage labor.
(iii) In UDCs the structure of the market and financial mechanism operates in
such a way that it is difficult to equalize the rate of interest and rate of
profit. Such equality may be possible, perhaps of organized money markets in the
(iv) In UDCs it is difficult to determine the nature of capital. Moreover, here
all the units of capital are not alike.
(v) The neo-classical- model is based upon the concept of marginal
productivity. But in case of UDCs it is difficult to assess marginal
productivity. Here the rains as well as droughts may change the marginal
productivity. Accordingly, how wages will be determined on the basis of marginal