J.E. Meade Model Economic Growth

James E.
Meade
Model of Economic
Growth
Prepared by: Hasanah I. Ameril

James E. Meade
(1907-1995)
• A British economist.
• He was born on 23rd June 1907
in England.
• Prof. J.E. Meade in his book ‘A Neo-classical Theory of
Economic Growth’ constructed model to study the process of
equilibrium growth.
• The model is designed to show the way in which the simplest
form of classical economic system would behave during a
process of equilibrium growth.
• He tries to establish a relationship between population growth
and income growth.
Three Principles
1. Capital accumulation resulting from the savings made out of
current income.
2. Growth of working population that growth of labour.
3. Technical progress which allows more and more output to be

produced by a given amount of resources.
Assumptions
1. There is a closed economy having no financial and trade links with other
countries.
2. Complete Laissez-faire is assumed to prevail in the economy.
3. There exists perfect competition in goods and factor markets.
4. Constant returns to scale exist.
5. The machines constitute the capital goods and all machines are alike.
6. The ratio of labor to machines can easily be changed in short run and long
run.
7. The production of consumer goods and capital goods is substitutable.
8. A certain proportion of machines becomes prey to depreciation.
Therefore, there rises the need for replacement of machines.
Determinant of Economic Growth
Production Function
Y = f (K, L, N, t)
Where:
Y = Net production of the economy.
K = Stock of machines.
L = Amount of labor.
N = Land or productive resources.
t = Technological progress
According to Meade the production of the economy can increase
if:
1. The stock of machines increases on account of increased savings. The
increase in capital is denoted by K and it will increase the income or
output by V∆K where V is the marginal physical product of a machine.
2. Y can be increased if there is increase in working population (L). If it
grows by ∆L, then income or output will increase by W∆L where W
represents the marginal physical product of labour.
3. The net output can increase, if technical progress takes place. If increase
in net output, in one year due to technical progress is ∆Y’, the total
increase in net output in one year is the sum of three influences.
Therefore:
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 (U)].
(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).
The above equation lead to the three factors:
1. It is raised by growth rate of real capital weighted by
proportion of national going to profit.
2. It is depressed by growth rate in the working population
weighted by one minus the proportional marginal product of
labour.
3. It is raised by the rate of technical progress.
Savings
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
ΔK/K = SY/K
As Uk = VK/Y . ΔK/K putting SY/K in place of ΔK/K, then:
Uk = VK/Y . SY/K = Vs
Putting the value VS in place of Uk in the above equation:
y - l = Vs - l (1 - Q) + r
Changes in Growth Rate
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.
Y=Uk+Ql+r and Y=Us+Ql+r
L and r are constant in Endogenous overtime in this case increase in Y
depends on whether UK=VS and Q is raising assume that l-0 that
population is constant then growth rate in the standard of living
become Y=VS+r
It is assume constant technical progress r then rise or fall in Y depend
on rise or fall in VS overtime.
Changes in Growth Rate
This shows that the level of output increases as the capital stock
increases. The slope of the curve OQ1 at A is less than at the point G
which indicates that the marginal productivity of capital at G is less
than marginal productivity at A. The higher production curve OQ2
shows at higher level of output is possible with same capital stock
provided technological improvements take place with the passage of
time.
Conditions of Steady Growth
If the level of technical progress remains same and population
increases at some particular rate, then the steady economic
growth requires the fulfillment of following conditions:
(i) The nature of technical progress should be neutral for all the
factors of production.
(ii) The elasticities of substitution between factors of production
are equal to one.
(iii) The ratio of wages, profits and rent remains the same.
Conditions of Steady Growth
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

Critical Growth Rate
• Capital
at which growth rate of income = growth rate of capital
stock
• A higher or lower growth rate in capital than this critical
growth rate will not equal growth of income and capital
therefore steady growth is not achieved.
a=Ua+Ql+r
a-Ua=Ql+r
a(1-u)=Ql+r
a=
Criticism
• It is unrealistic assumption such as perfect competition, closed economy
constant returns to scale.
• In perfect competition was very diverse from reality.
• It was wrong assumed that production units are independent of one another.
• In reality, increasing returns to scale in the growth process.
• It assume that machinery were perfectly malleable in the short run and long
run in the short run was not possible.
• Totally ignored I the point of view of economic growth.

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James E.

Prepared by: Hasanah I. Ameril

2. Growth of working population that growth of labour.

3. Technical progress which allows more and more output to be

Y = Net production of the economy.

N = Land or productive resources.

As Uk = VK/Y . ΔK/K putting SY/K in place of ΔK/K, then:

S = SvU + SwQ + SsZ

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