Theories of economic development

The Harrod- Domar theory of economic growth considers that the rate of growth of GNP is determined mutually by the national savings ratio and the national capital-output ratio.

As a result in order for an economy to grow, the most vital strategies is to save and invest a certain proportion of their GNP; but then the real rate at which they can grow for any level of saving and investment, depends on how much additional amount produced can be had from an added item of investment.

While this theory confirms the major hurdle to development is the capital limitation and constraint, this comes to be the cause for transfer of capital and technical support to the developing nations. Meanwhile, critics suggests savings and investment are not necessary adequate for accelerated rates of growth.

On the other hand, the new 1990s Models of endogenous growth focus on the parts of human capital, market failure and imperfections as well as earnings to scale that play the active role for public policy in stimulating economic development. The endogenous growth model claims that the determined GNP growth is constructed based on the combined phases of the creation process itself and not the external forces of the system appropriately known as the exogenous influences.