We now pass from statics or comparative statics to dynamic analysis. In static analysis, for example, we discuss how equilibrium price is determined when the demand and supply curves are known and remain unchanged. Static analysis helps us to analyse a situation where consumers, producing firms, industries, etc., are in stable or static equilibrium at certain levels of prices, output, income and employment.
In comparative statics, we analyse a situation. which has come about after a once for all change in other words, we compare the two stable equilibria one before and the other after the change. For example, suppose demand has permanently gone up. Now there will be new equilibrium price or an equilibrium different from the first.
But these methods of analysis have their limitations and cannot analyse many important and pressing problems, for example, the problems of economic fluctuations booms and slumps and the problems of economic growth.
In the study of economic growth, instead of looking at the rates of output per period of time, we look at the rates of change in the rate of output between periods of time. In static analysis, certain basic elements in the economy (e.g., size and composition of the population, natural resources, consumers’ tastes, production techniques, etc.) are taken as given and fixed. These basic factors determine the levels of income, output and employment.
In analysis of economic growth, some or all these basic elements are supposed to change and we have to determine the rates at which output is changing. We study the conditions of steady growth rate or determinants of economic growth.
Let us first study how the theory of economic growth has emerged and has come to occupy the attention of economists today.
Emergence of Theory of Growth
In the course of the last 50 years or so, a separate branch of economic theory has emerged which studies the factors which contribute to increase the level of national income and output of a country and raise the standard of living of its people.
During the last 60 years more than 150 countries of the world have achieved independence. In these countries, millions of people are still living in absolute poverty with inadequate food, shelter, education and healthcare facilities, and are also facing low income, high birth rate and unemployment; whereas in the industrial countries of the West people are living with high luxurious facilities.
The question arises, why the former are living in such poverty and how can the barriers of poverty be broken? The answer lies only in economic development. So, what is economic development and how can we clearly understand it?
This new branch of economic theory is variously labelled as ‘Economics of Growth,’ ‘Economics of Under-development,’ or ‘Economics of Development.’
For our purpose here, we shall use the term ” Development Economics”. We shall like to acquaint the students with the new and emerging branch of economics. This branch of economic involves much more of economic generalizations in relation with the political economies of different countries.
The study of economic development is one of the newest branch of economics, which largely deals with the economic aspects of the development process in developing countries with a focus on method of promoting economic growth while also dealing “with the economic, social, political and institutional mechanism, both public and private, necessary to bring-out rapid and large scale improvements in levels of living for the peoples” living in developing countries.
Thus, development economics involves the creation of theories that explain the determination of types of policies and practices, which can be implemented at either the domestic or international level that will improve the standard of living for the general population of the developing countries.