The Kaldor Model of Economic Growth was developed by Jose Kaldor. It has been considered as the most important work on economic theory ever written. It is so famous that many economists consider it their major work and use parts of it in all of their work. This book is one of the most respected and long-running in the field of economic theory. One of its most useful insights is that the key to increasing economic output is not increasing the amount of money but actually improving the efficiency with which money is produced. This concept is fundamental to all economic theories, including the model.
One of the strengths of this particular economic model is that it makes no assumptions about the relationship between money and the economy. It is based on a fundamental law of economics that operates regardless of whether there is a state of inflation or deflation. Instead, all that is necessary for the economy to operate is that prices of goods and services are determined by supply and demand. In addition, unlike earlier models, it does not treat savings and investment as external variables affecting the functioning of the economy. The fact that Kaldor has made this model accessible to a broader audience than had been possible makes it more useful and relevant today than ever before.
Another strong advantage of the Kaldor-Roth theory of economic growth is that it provides a baseline from which realistic expectations about future performance can be established. Since all economic activity begins with the production of goods and services, the theory is important for determining the viability of specific economic policies. By tying policies to concrete goals and objectives, it enables policy makers to evaluate their policies over the long term against their theoretical expectations. For instance, by quantifying how much money will be spent on infrastructure in five years, or what percentage of GDP should be spent on public works, the Kaldor-Roth model provides a sound base for any evaluation of long-run economic policy.
The Kaldor-Roth theory also provides a unique approach to analyzing the relationship between economic policies and various economic variables. Rather than using the traditional long-run averages of output, revenue, unemployment, and industrial production, it examines the short-run effects of changes in the variables most relevant to the economic growth goal. Kaldor (personal correspondence, 1977) distinguished between three types of economic indicators: consumption, production, and investment. By isolating and analyzing these three categories, Kaldor (1977, p. 5) showed that the relationship between economic growth and variables within each category can be analyzed using a Kaldor-Roth framework. Specifically, he illustrated the use of a binomial model in order to evaluate investment according to historical experience.
A variety of alternative models have also been developed since the early 1970s. These include the productivity-price index model, the production-link theory, and the Benning model of economic development. More recently, researchers have extended the Kaldor-Roth theory of economic growth by studying the determinants of real per capita GDP growth, exploring the effect of . . . . . . international trade, and analyzing the determinants of technological change. Most modern applications of this theory to conclude that a key determinant of long-term economic growth is the efficiency of capital income methods. Economists debate the extent to which this efficiency specification is important in modern economic problems, with some acknowledging its importance and others claim that modern political and legal constraints make some forms of efficiency unattractive.
In its early days, the Kaldor-Roth theory had undergone critical review by major American economists such as Henry Carey and George Stigler. However, it was critiqued constructively by two eminent British social scientists, Bernard Knight and John Kay. They pointed out several flaws in the original version and suggested ways in which the economic theory could better be understood. These criticisms were instrumental in the development of the Kaldor-Roth model as outlined by Michael Sproull. Although the debate over its viability continues, this remains an interesting example of how theories can evolve in the face of new research.