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Difficulty: MediumDevelopment Planning Strategies and Models

According to Ragnar Nurkse's economic development theory, low capital accumulation perpetuates underdevelopment through a self-reinforcing circular chain of cause and effect. Which of the following represents the correct logical sequence of stages in the supply-side vicious circle of poverty, starting from low worker productivity?

  1. 1Low level of worker productivity
  2. 2Low level of real income per capita
  3. 3Low capacity to save
  4. 4Low rate of capital formation

Answer

The correct sequence begins with low level of worker productivity, followed by low level of real income per capita, then low capacity to save, and ends with low rate of capital formation.
In Nurkse's supply-side model, low worker productivity leads directly to low real income per capita. Low income limits the capacity to save, which deprives the economy of investment resources, leading to low capital formation and completing the cycle back to low productivity.

Step-by-Step Solution

1
Identify the cause-and-effect relationship on the supply side of Ragnar Nurkse's vicious circle model.
Low worker productivity directly causes low real income per capita.
An economy cannot generate high income per person without high output per worker.
2
Determine how low income affects household behavior.
Low real income reduces the capacity to save.
When income is near subsistence level, the marginal propensity to consume basic necessities approaches one, leaving negligible savings.
3
Connect savings capacity to capital formation.
Low savings result in a low rate of capital accumulation.
Investment is financed by savings; without savings, capital formation stays low, perpetuating low productivity.

Key Concept

Ragnar Nurkse's Vicious Circle of Poverty (Supply Side)
Estimated Time:1m 30s
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Topics

Development Planning Strategies and Models

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