Growth Strategies 

 


Strategy II - accelerated growth

of sector 1
 

 

Technology and initial conditions are the same as before, however, planners set the long run growth target to 5 percent. By preferentially allocating investment to sector 1, rate of growth is sequentially increased to its target value.

Target rate of growth:

gp = .05

Sequential adjustment of annual rates:

gt

=

gp

This formula represent one of the possible strategies of accelerating the economic growth: gt is increased step-wise. In the first step it is set to one half of a distance between the steady state rate (1%) and the target rate (5%) that is to 3%. The next step is 2/3 of that distance. The increase is getting smaller in each subsequent step so that the rate converges to the long run target rate gp in about 5 years.

 

Now we can generate new paths of  X, X1 and X2 using the same equations as above. The only difference is that gt is not constant this time.

 

This strategy seems to bring quite impressive results. The growth of sector 1 accelerated to 5% per year within first five years. True, consumption initially declined but in the fourth year it was already growing faster than under the steady state strategy I. This original 'sacrifice' seems to pay off very well. From the year 6 on consumptions grew by 5% per annum. While under the strategy I the total consumption increased to only 55.9 in 15 years, under this strategy consumption reached the level 77.2.

 

Notice also a very impressive growth of the aggregate output: it increased in 20 years from 200 to almost 500, that is by almost 150% compared to less than 25% increase when strategy I was used.

 

 

 

 

 

 

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