Harrod-Domar Growth Model: The peculiar nature of the production function is evident from the specification that only

capital, but not labor is a factor contributing to production. This means that, so long as capital remains the same, output does not increase whatever the increase in labor. In other words labor and capital are not substitutable in production. However, in the long-run process of development, where major technical advances are expected, fixed factor proportion does not seem to be relevant assumption. The Harrod-Domar model focuses on two critical aspects of the growth process: saving and the efficiency with which capital is used in investment. This model can provide accurate short term predictions of growth and has been used extensively in developing countries to determine the required investment rate or financing gap to be covered in order to achieve a target growth rate. The Harrod-Domar model is simple with relatively small data requirements and the equation is easy to use. However, the model only remains in equilibrium with full employment of both labor force and capital stock causing inaccurate longer term economic predictions and fails to account for technological change and productivity gains considered essential for long-term growth and development. Moreover, Domar himself rejected the use of this model for long run economic growth. Solow (Neoclassical) Growth Model: In the 1950s, MIT economist Robert Solow presented a new model of economic growth that addressed limitations in the Harrod-Domar model. He replaced the fixed-coefficients production function with a neoclassical production function. This model allowed for substitution between the factors of production so that the relative endowments of capital and labor could be reflected (rather than the fixed ratios required by the Harrod-Domar model). The neoclassical production function has curved, rather than L shaped, isoquants allowing flexibility in using different combinations of capital and labor. Output can be expanded in one of three ways: (1) increases through fixed and equal portions of labor and capital, (2) increases in capital, or (3) increases in labor. The Solow Growth Model assumes a production function with the property of diminishing returns where each additional increment in capital per worker results in less output. However, technological change is seen as increasing productivity. The neoclassical production function showed increasing technology or knowledge as labor augmenting and increasing output. Solow assumes technology increases independent (exogenous) of the model in two forms: mechanical (improved machinery, computers, etc.) and human capital (improved education, health, worker skills, etc.). Key determinants of growth are population growth and technical change and over time poor and rich countries incomes should converge. Sources of Growth Analysis Robert Solow also developed a procedure, growth accounting or sources of growth analysis, to focus directly on the contribution of each term in the production function. The objective was to determine what proportions of recorded economic growth could be attributed to growth in capital stock, growth in the labor force, and changes in overall efficiency.

Using the formula Y=F(K, L, A) where Y is output, K is capital, L is labor, and A is a parameter meet to capture the effects of things other than capital stock and labor supply which might influence growth (increasing technology, worker skill levels, education, health, institutions, etc.). A is generally referred to total factor productivity (TFP). Since A captures not only efficiency gains but also the net effect of errors and omissions from economic data, the residual A is sometimes referred to as a measure of our ignorance about the growth process. When Solow modeled data for US GNP from 1909 to 1949 of increased output less than one half of the gain could be explained by increased inputs in labor and capital. With more than fifty percent of growth attributable to the residual, logic would dictate that there must be a significant gain in productivity coming from one or more efficiency enhancing factor(s) (technical change, increased knowledge, innovation, entrepreneurship, etc.) but the problem lies in actually identifying the factors affecting increased productivity. Lewiss Theory of Development: The key to the model is the notion that the supply of labor to the modern sector is infinitely elastic at the going wage rate. In other words, capitalists will not have to continually raise wages to attract increasing amounts of labor into the modern sector. One reason for this will be the existence of disguised unemployment in the traditional sector where the marginal product is negligible, zero or even negative. Limitations: The model has been subject to a number of criticisms, especially since some of its key assumptions do not appear to fit the reality of life in most contemporary Third World countries. First, the model assumes that employment transfer proceeds at the same rate as capital accumulates in the modern sector. However, there may be labor saving advances going on. Indeed, in most third world countries, the capacity of the industrial sector to absorb labor has turned out to be rather small. Also, many industrialized countries have seen marked labor shedding by their own manufacturing sectors in the past decade or two. Second, implicit in the model is the notion that there is surplus labor in rural areas and full employment in urban areas. Research indicates that the reverse is more likely to be true in many Third World countries. Third, nominal and real urban wages in the capitalist sector of many Third World countries appear to be able to rise rapidly, even when there is substantial unemployment. Fourth, the model presumes the existence of entrepreneurs who will act in the way specified. Some would argue that the major problem of economic development is to create the conditions under which an entrepreneurial class will come into being. Dependency Theory: . Prebisch's solution to the underdevelopment of third world countries was straightforward: poorer countries should embark on programs of import substitution so that they need not purchase the manufactured products from the richer countries. The poorer countries would still sell their primary products on the world market, but their foreign exchange reserves would not be used to purchase their manufactures from abroad. Limitations:

Three issues made this policy difficult to follow. The first is that the internal markets of the poorer countries were not large enough to support the economies of scale used by the richer countries to keep their prices low. The second issue concerned the political will of the poorer countries as to whether a transformation from being primary products producers was possible or desirable. The final issue revolved around the extent to which the poorer countries actually had control of their primary products, particularly in the area of selling those products abroad. These obstacles to the import substitution policy led others to think a little more creatively and historically at the relationship between rich and poor countries. Rostows Stages of Development Rostow described the first stage of development as traditional society. This is defined as subsistence economy based mainly on farming with very limited technology or capital to process raw materials or develop services and industries. Preconditions for take-off, the second stage, are said to take place when the levels of technology within a country develop and the development of a transport system encourages trade. During the next stage, take-off, manufacturing industries grow rapidly, airports, roads, and railways are built, and growth poles emerge as investment increases. Stage four is termed the drive to maturity during which growth should be self-sustaining, having spread to all parts of the country, and leading to an increase in the number and types of industry. During this stage more complex transport systems and manufacturing expand as transport develops, rapid urbanization occurs, and traditional industries may decline. In Rostow's final stage, the age of mass consumption, rapid expansion of tertiary industries occurs alongside a decline in manufacturing. Limitations of Rostow's Stages of Growth Model: Rostow starts with the assumption that countries will develop along the same path, that countries cannot skip stages, do stages in a different order. Splitting the process of development into stages may be simplifying what actually occurs. The model is ethnocentric; it is based on American and European history and shows American high mass consumption to be the end result of development. The model assumes that capitalist development is the only way to achieve economic development his model represents a "non-communist manifesto".