CHAPTER FOUR

QUANTITATIVE DEVELOPMENT
PLANNING TECHNIQUES

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4.1. Introduction
• As it is already discussed, development planning is a form of policy
analysis which involves the use of planning models
• A planning model helps to specify, in quantitative terms, the
relationships between objectives, constraints and policy instrument
variables
• The model is then used to calculate a feasible or consistent solution,
defined as a set of values for the policy instruments that satisfies the
specified objectives and does not exceed the predetermined
constraints
• The quantitative planning models therefore provide a framework
within which the various agencies involved in the planning process

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can carry out a fruitful dialogue regarding the possibilities and trade
– offs facing the nation.

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 4.2. Characteristics of Development
Planning Techniques
• The characteristics of development planning models can be analyzed in terms of
the scope, aggregation, time, behavior, closure, and accounting framework in the
context of which the models are applied.
A. Coverage: In terms of coverage or scope, planning models can be classified into:

I. Overall or national models:- deal with the entire economy and the nation’s
dev’t strategy

II. Sectoral or regional models:-deal with individual producing sectors and

regions

III.Special models :designed for selected aspects of the overall plan

IV. Project analysis.

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B. Aggregation
I. Aggregated models :- treats the economy in its entity ( the whole economy is
treated as one producing /consuming sector)
II. Main sector models: - dividing the economy in to major sectors.

- Example: Lewis model dichotomizing the economy into agriculture and

non agriculture sectors.
- Mahalonobis model by divides the economy in to consumption and
capital goods producing sector.
III. Multi sector models:- the economy is divided into large number of
sectors which are interrelated. Ex Input-Output model, Social

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Accounting Matrix.

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C. Time
• There are two aspects of the time dimensions in planning models. These are;
how far into the future a model is designed to project and the way time is treated
within model.
 Based on how far into the future a model is designed: time span

I. Short-term, covering typically a year ;

II.Medium-term, covering a 3 – 7-year horizon ; and
III.Long-term, extending to 10 years or more
 With respect to time treatment

I. Static Model or
II.Dynamic model

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D. Behavioral Relationships
• Planning models can be classified as either stochastic or
deterministic systems, depending on the way in which behavioral
relationships are treated
• In the stochastic models, behavioral relationships, e.g., savings
and investment, are estimated by using econometric models
which allow for stochastic or random disturbances
• In contrast, deterministic models, such as the open input output
system, do not specify any behavioral relations and instead treat
them as exogenously or administratively determined.

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E. Degree of closure
• Open models:-if the variables are not explained within
the system. E.g open input output model
• Fully closed models:- if the variables can be calculated
within the system itself
• Partially closed models:- if more than one value of the
variables is possible to calculate within the system. E.g.
In linear programming optimization problem.

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F. Accounting framework
• Consistency models:- when models provide a
consistency relationship between the identity of
variables E.g. Aggregate models H-D models.
• Programming models;- when models proved
inequity relationship between the identity of
variables. It deal with optimum and efficient
allocation of scarce resources.

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 4.3 Aggregate Consistency
planning Models
• The process of economic growth is central to the economics of
development, and growth models represent the earliest approach to
development planning.
• In this section, two simple and well – known aggregate consistency
models, namely the Harrod-Domar model and the two – gap model are
discussed

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 The Harrod-Domar growth
model
• The H­D growth model provides the simplest possible framework within which the
relationships among the aggregate macro variables can be examined.
• The elements of HD model can be found investment requirements and the role of
savings are analyzed in the formation of the economic plan.
• Assumptions Of HD model
 Saving S is a simple proportional function of national income.

; where s is the marginal propensity to save.

 The amounts of capital K and labor L required to produce any given flow of
output Y are “uniquely” given.

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• where is the labor-output ratio, or - capital-output ratio

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 The Harrod-Domar growth model
• In a simple form, the HD model could be set out as follows:
• From the national income equilibrium conditions, we know that

where I is the net investment (assuming no depreciation)

• In the a given period of time saving equals to investment which shows warranted rate of
growth.

• where t is the time and a dot denotes change with respect to time.
• Then, change in capital accumulation and capital formation at any point in time can be
given as:
that is in terms of rate of increment

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• Substitution of equ.6 in to equ-43

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 The Harrod-Domar growth model
• Where St= saving at year t, It= investment at year t, Kt= capital stock at year t, Yt-l = last year national

income, Kt+l= capital after a year

• After making the necessary substitution from equation 4, 5, and 6 above, we get

then

• which is equivalent to

• In incremental or marginal terms

• or

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• The rate of growth of output is determined by the ratio between savings and capital-output ratios. It can

also be shown that the rate of growth of capital stock is a constant and equal to s/v.
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 The Harrod-Domar growth model
• Replacing Y by in equations- 8, we obtain

• Therefore,
• Since growth of income (g) is defined as

• Equ-13 the fundamental equation of the H-D model which indicates that, given the
historically determined and constant values of s and v, the maximum rate of growth of
capital stock is deter­mined by the ratio s/v.
• This in turn determines the maximum attain­able rate of growth GDP under the existing
economic environment

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 The Harrod-Domar growth model
• For example, if the population is expected to grow at 3 per cent per year and the
planners would like to achieve a steady 4 per cent rise in per capita income then GDP
must grow at 7 per cent annually. If we assume an aggregate capital – output ratio v of
3 then for a 7 percent target growth of GDP the required savings rate can be calculated
from the fundamental equation (13) as

• That is, 21 per cent of GDP must be saved so that actual saving is equal to the planned
investment required to achieve a 7 per cent growth of GDP.

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HD growth model

• There are three main sources of domestic savings:

• i) Personal savings,
• ii) Business savings and
• iii) Government savings.

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HD growth model
• In developing countries, since capital is seen to be the limiting factor to
growth, the cost of capital (real interest rate) is often kept deliberately below
the market rate.
• This deliberate credit rationing policy, instead of encouraging private
investment, leads to the misallocation of investible funds and results in a
higher capital – output ratio, v. at the same time, a low (and in an inflationary
situation, a negative) real interest rate discourages private savings, resulting in
a low savings rate, s, and thus giving a clue to the historically low s/v ratio.
• In order to solve this problems the following policy implications required:

I. Liberalize the financial market,

II. Develop financial institutions which will mediate between savers and
investors.

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HD growth model

• Limitation of the model

• H-D model is highly aggregated and does not provide any
idea about the interrelationship between different sectors.
• It is not clear about the difference between marginal and
average capital output ratio and whether it is global or
domestic one

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 Two-Gap Model
• If the mobilization of domestic savings through taxation and financial reforms is not
enough to finance the required investment, the savings—investment gap can be
closed by foreign savings​
• The gap between the ‘required’ investment and ‘actual’ domestic savings can be
financed by a deficit in the current account​
• Foreign exchange is, therefore, required for the dual function of meeting both the
‘trade gap and the ‘savings gap’ The previous section showed how foreign savings
could meet a shortfall of domestic savings and enable the ‘required’ level of
investment to be undertaken​
• Consideration of the role of foreign savings in the growth process is the main

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focus of the two-gap model developed by Chenery and associates​

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 Two-Gap Model

• The assumptions of two gap model.

1. There exists a fixed maximum propensity to save out of income.

• where s is the average and marginal propensity to save.

2. Certain capital goods can only be obtained from foreign sources.

3. There is a lack of substitutability between domestic and foreign resources. This
means that there is always a minimum amount of foreign exchange required to
sustain growth.

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 Two-Gap Model
• The fixed proportion production function of the H – D model can be rewritten as;

• Where is the amount of domestic capital required to produce one unit of output and is the
amount of foreign capital required to produce one unit of output.

• To see the implications of the existence of a domestic savings or foreign exchange

constraint, we can assume for simplicity that the country in question imports capital
goods only, so that
• where M is the quantity of imports

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 Two-Gap Model
• Let us further assume that imports are a fixed proportion of GNP, such that

• …………..……(18)

• From the supply side, export possibilities depend on the economy S output capacity, so that

• 0 < x < 1.

• Let us suppose that the growth rate permitted by foreign exchange is less than that permitted by
domestic savings. Thus, from the production function (15), we have

• Differentiating both sides of the above equation with respect to time t, we obtain

= ̇……………………… (20)

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 Two-Gap Model
• Substitution of (16), (17),(18) into (19) yields

Therefore, …………(21)

• That is, the growth of output is equal to the ratio between the import – output ratio m and the
incremental foreign – investment – goods – out put ratio k2.

• Similarly, if domestic savings is the limit to growth, we shall have

• which is exactly the same condition as the fundamental equation of the basic H-D model.

• If the planners set a target growth rate of, say, g*, the required savings ratio s* and import ratio
m* can be calculated from equations (20) and (21) as:

• s* = g* k1 ………………… (23)

• And m* = g* k2. ……………………….(24)

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 Two-Gap Model
• If the maximum domestic savings is found to be less than the level required to achieve the target growth then there is said to
exist an investment-saving gap equal to

I*d – max S = S*d – max S

(since in equilibrium Id* must equal S*d)

I*d – max S = s*Y – sY

• = k1 g * Y – sY. …………………………………..(25)

• Similarly, if the maximum export potential (earnings) is found to be less than the minimum import requirements for the target
growth then there is said to exist an import – export gap equal to

• M* ­- max X = k2 g * Y – xY. …………………..(26)

• Even though, according to the national accounts identity, the ex post investment – savings gap must be equal o the ex-post import
– export gap, there is no reason for these two gaps to be equal ex ante (in a planned sense). Therefore, the investment – savings
and import – export gaps (ex ante) can be written as:

• k1g* Y – sY ≤ F …………………………………….(27a)

• And

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• k2g* Y – xY ≤ F ……………………………………..(28a)

• , Where F is the foreign capital (exchange) inflow.

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• Figure 4.1 Two-­gap model restrictions (Source: Chowdhury &
Kirkpatrick, 1984)

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 4.3. Disaggregated consistency development
planning Models
• The planning exercise does not stop at the most aggregate level with the setting of
a GNP growth target and the calculation of required investment, savings and
foreign capital inflows
• As mentioned earlier, the whole process proceeds in stages and the second stage of
the planning exercise usually involves a further breakdown of the plan to cover a
number of strategic sectors of the economy
• The economy is the sum of the individual sectors, so the target growth of GNP will
imply specific rates of growth for the component sectors

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 4.3.1. Main Sector Models
• Besides increasing the overall growth rate, development planning
also aims at transforming the sectoral balance of the economy.
• This means that at the second stage the planners must ensure that the
target sectoral growth rates satisfy the conditions for a “balanced”
growth.
• The main – sector models enable the planners to break down the
aggregate growth target and investment requirements into sectoral
targets and requirements as well as to specify conditions for a
“balanced” growth.

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 Characteristics of the main – sector
models
• From this perspective the main – sector models must fulfill certain
requirements.
• These are: completeness, consistency, and economical and realistic
requirements.
• A) Completeness: when sectoring the economy no activity can be left
unaccounted for.
• b) Consistency:  this requirement follows from above
• c) Economical and Realistic Requirements:  There are operational
requirements. The number of sectors should be kept within a manageable
limit.

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 Consider the two sectors: Consumption goods sector
and Investment goods sector
• In the first stage of the planning exercise with the aggregate models, we have seen
the crucial role of capital accumulation and savings
• Since savings is an abstinence from present consumption, it must be rewarded with
a higher level of consumption in the future.
• Therefore, at the second stage of the planning exercise, the planners can divide the
economy into an investment goods sector and the consumption goods sector
• This will enable the planner to evaluate the tradeoffs between present and future
consumption.
• If for simplicity we assume that there is no intermediate transaction between the
two sectors and they are only purchase final goods from each other then the output
of the two sectors will add up to the GDP. That is,

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 Consider the two sectors: Consumption goods sector
and Investment goods sector
• X1 + X2 = GDP ………………(30)

• Where X1 is the output of the investment goods sector and X2 is the output of the
consumption goods sector.
• Given the marginal propensity to consume (MPC), the supply of consumption
goods should be sufficient to meet the demand for them.

• X2 = b (X1 + X2) …………..(31) Where, b is the MPC.

• From equation (31) one can see that, for a given MPC, the output or productive
capacity of the two sectors must bear a constant relationship to each other such that
• …………(32)

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rX1
• Therefore, Is the rate of growth of capital stock in the
investment goods sector
• If of capital goods is assigned to the investment good sector then
will be left to be assigned to the consumer goods sector
• Therefore, the net addition to the consumer goods sector’s
capital stock is Is the rate of growth of capital stock in the
consumer goods sector
• Clearly, the growth of the consumption goods sector’s capital
stock depends in the composition of capital stocks in the two
sectors

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rX1
• However, ultimately the growth rate of capital stock in the
consumption sector will rise to a new level, and a higher
steady – state equilibrium will be established at E1 when
For policy purposes, it is essential to ask what happens to
consumption in the short run under the new investment plan
• Obviously, during the period when the growth rate of the
consumption goods sector falls, the growth of consumption
must be restrained to keep it within the supply capacity of
the sector

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4.3.2 Input-Output planning
models
• In the ‘Processing Sector’, Xij shows origin and destination of the output of row
industry i

• In the ‘Payments Sector’, subscripts indicate the industry or final demand sector
making payments for factors and payments for imports

• Quadrant I, indicated by QI in Figure 5.3, records inter­industry transactions

• Quadrant II records payments by industries to factors of production and to

foreigners for purchase of imports

• Quadrant III records the final demand for goods and services including exports

• Quadrant IV records the direct sales of factors of production and imports to final
users

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The input coefficients
• X ≡ the column vector of total output for each
industry
• Y ≡ the column vector of final demands for each
industry Then, from equation
• 1­ ≡ the Leontief inverse matrix (after Wassily
Leontief who introduced the Input

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Backward and Forward
Linkages
• Xj ≡ the total output supplied by the industry in
the jth column
• Example: Consider an economy where there are
two industries, coal and steel
• a) Let’s start by providing the input output model
as

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4.3.3. Multisector Models: Social
Accounting Matrix
• The inability of the input – output model to deal with issues
of income distribution and growth and the incomplete
nature of multiplier analysis can be overcome by extending
the input – output table to include institutional accounts –
income and expenditure of households and other socio –
economic groups
• In terms of the accounting framework, it involves the
mapping of factoral incomes into incomes of various
households and institutions

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4.3.3. Multisector Models: Social
Accounting Matrix
• The term “social” as opposed to “national” has
special significance which arises from the attempt
to classify various institutions according to their
socio – economic background instead of their
economic or functional activities alone, as in
national and input – output accounts

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The Social Accounting Matrix
• Thus, T33 is the input – output flow matrix which
records transactions between producing sectors or
industries

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 The Social Accounting Matrix
• the sub matrix T13 represents payments by producing sectors to factors of
production

• and T21 maps household and other institutional incomes from factor incomes

• The transformation of institutional incomes into demand for production activities

is recorded in the sub matrix T

• The row sum ti is the total receipts of the ith account

• The column sum, ̂ represents the total expenditure

• By the accounting rule, ti = tˆi

• On the assumption that each account distributes its income in fixed proportions
we can normalize each transaction sub matrix Tij by the vector ̂ to give

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The Social Accounting Matrix
• Ci is the total consumption expenditure of the ith
type of household
• and Cki is the consumption of the kth sector by
the ith household type
• Since total outlay is equal to total income, Cki /
Ci represents the ith type household’s average
propensity to consume the kth sector’s product

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The Social Accounting Matrix

• A32 represents the marginal propensities to spend

by the households on different sect oral products
• t2 is the level and distribution of income across
institutions

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4.3.3.1 Limitations of Multi  Sectoral
Planning Models
• the technology and capital coefficient matrices
are constant and
• the technology and capital coefficient matrices
are unique, i.e. there is only one production
technique available to each sector or industry

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There are two problems associated with
the first assumption
• a) The assumption of constant technical and capital coefficients implies constant
returns to scale and hence appears to be in contradiction with economic
development characterized by the phenomenon of increasing returns to scale

• The problem of variable coefficients is generally tackled by forecasting changes

in the input structure and product mix on the basis of past experience

• The problem of introducing new activities is handled by adding new rows and
columns with technical coefficients obtained ether from engineering data or on
the basis of statistical experience of similar activities already established in
countries of comparable economic development

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There are two problems associated with
the first assumption
• In technical terms, the problem is to choose the optimal
production process, given the scarcity price of resources
under their existing configuration
• The standard input – output technique which is the core of
multisectoral planning models cannot handle the problem of
choosing the optimal production process which would yield
the same total output while making the least use of
whatever resources are most limited

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4.4 The Linear Programming Model

• Linear programming is the most widely used

programming method in which all the functions
involved are assumed to be linear
• Linearity implies that the objective function and all
the constraints are summations of decision variables,
each of which is multiplied by a coefficient or
parameter
• One further assumption is that the decision variables
must be non­negative

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An illustrative example
• The first step to find the solution is to be able to define the decision variables and
parameters

• The decisions are the amounts of products, that is, levels of agricultural and
manufactured output that the country should produce

• The parameters of the problem are

– Number of workers required per unit of agricultural and manufactured products
– Units of capital required per unit of agricultural and manufactured products
– Total available amount of resources
– Price per unit of agricultural and manufacture products

• State the objective function and constraints

• The constraints are on the availability of resources

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Resources used ≤ resources
available
• In terms of the parameters and the decision variables, the constraints are: The
condition that negative amounts of neither product can be produced implies a
further constraint as: X1  ≥  0 and X2  ≥  0 Therefore, we can summarize the
country’s resource allocation problem as: The solution to the linear programming
problem entails finding values for X1 and X2 which will maximize Z and at the
same time are feasible in the sense that the attainment of these values does not
violate any of the constraints, including the nonnegativity conditions

• The solution to a linear programming problem can be sought using either the
graphical method, or the simplex method

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4.4.1 Graphical Solution
• Feasible solution: refers to all those values of X1
and X2 which satisfy the given set of constraints
• Feasible region: is the region which contains all
possible feasible solutions
• Optimal solution: is a feasible solution which
optimizes the objective function

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4.4.2. The Dual and Economic
Interpretation of Its Solutions
• Theorem I The optimal values of the primal and
the dual objective functions are always
• Theorem II     a) If a certain decision variable in
the primal program is optimally nonzero then the

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4.4.3. The Simplex Method
• The simplex method is a method used to solve linear
programming problems especially when we have
three or more decision variables
• The simplex method is an iterative procedure which
makes use of corner points of the basic feasible
region
• The iteration continues until the optimal solution is
obtained

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Example
X1 = 33

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