What are various Economic Growth Models?

Economic Growth Models are several theories to explain the process of economic growth. Some of the important economic growth models relevant for General Studies include Harrod-Domar Growth Model, Lewis Structural Change model, Rostow’s 5 Stages of Economic Development model etc. A brief description of these are as follows

Harrod-Domar Growth Model

This model is actually an integrated version of two different models viz. Harrod Model and Domar Model. This model is based on the premise that unless and until capital formation (savings / investment) and increase in real national income go side by side, growth will not sustain for long. This model considered demand as well as supply side of the investment process. This model actually explained the business cycle but then was used to explain economic growth. As per this model – increased savings lead to increased investment, which leads to increase in capital stock, leading to increased output, and consequently increased national income, thus, again leading to increased savings – as shown in below graphics.

Overall, this was a classical model which concluded that Economic Growth depends on amount of labour and capital. Many low development countries have labour in abundance but lack capital and that is why they don’t grow.

Lewis Structural Change Model

This is yet another economic growth & Development model which explains the structural changes in an economy from traditional to modern industrialized one. As per this model, each underdeveloped economy has two segments viz. traditional and industrialised. The traditional economy is characterized by low productivity, low income, low savings and high under employment, thus signifying subsistence nature of the economy and low economic growth. The underemployment and low income would force the labour from this segment to industrial sector in urban environment. This would lead to higher incomes, more savings, more investments and thus more overall economic growth. This model thus concludes that a structural shift from primary to secondary economy would result in economic growth. Obviously this has its own limitations.

Rostow’s 5 Stages of Economic Development Model

This model was given in 1960 by WW Rostow. He suggested that countries passed through five stages of economic development viz. Traditional Society, Transitions stage, take off stage, Maturity, and High Mass consumption. The key features of each of these stages are shown in below graphics:

The above graphics is self explanatory and somewhat similar to the three sector model which says those low income economies have dominance of primary sector and as the economy develops it changes into industrialized economy and then service economy.