Eco 448 Economic Planning II

NATIONAL OPEN UNIVERSITY OF NIGERIA
ECONOMIC PLANNING II
ECO 448
FACULTY OF SOCIAL SCIENCES
Department of Economics
COURSE GUIDE
Course Developer:
Dr. Akinade O. Matthew
Lagos State University, Lagos
Edited by:
Dr. Peter Medunoye

Senior Research/Economic Planning Consultant,
Econometrics Associate Research Firm
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CONTENT
Introduction
Course Content
Course Aims
Course Objectives
Working through This Course
Course Materials
Study Units
Textbooks and References
Assignment File
Presentation Schedule
Assessment
Tutor-Marked Assignment (TMAs)
Final Examination and Grading
Course Marking Scheme
Course Overview
How to Get the Most from This Course
Tutors and Tutorials
Summary
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Introduction
ECO 448 is designed to teach you and to build on your understanding of Economic
planning as contained in the course material of Economic planning I. In this course,
attention is given to the dynamics and workings of the techniques and models of
economic planning as it relates to the functionality of the economy for desired Economic
growth and development. It is primarily concerned with the explanations of the models
and techniques of Economic planning that can be adopted by the central authority to
exercise their conscious effort of achieving definite targets and objectives within a
specified period of time. In this wise, Economic planning incorporate all aspect of human
development aspirations to accelerate the pace of a country‘s social, economic and
political development. More specifically, it is a study that shows the technique of
deliberate control and direction of the economy ,by a central authority through various
tools and sub-systems within the main system, for the purpose of achieving definite
targets and objectives within a specified period of time.
You will be taught the dynamics and workings of the techniques and models of economic
planning as it relates to the functionality of the economy for desired Economic growth
and development by the central planning authority to achieve desired set goals and
objectives in Less Developed Countries of which Nigeria is one. It is also to provide a
basic quantitative and qualitative understanding of how the models works to achieve
medium and long-term economic aims which requires a blend of macroeconomic analysis
and real life application in executing economic planning policies.
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Course Content
This course builds on the exposure of students to Economic planning I . Topics covered
include: Understanding techniques, model and requisites of economic planning, Input-
output analysis in planning, Social accounting matrix, General equilibrium and
computable general equilibrium models of economic planning, Linear programming
technique and cost benefit analysis in planning .
Course Aims
There are Twelve (12) study units in the course and each unit has its objectives. You
should read the objectives of each unit and bear them in mind as you go through the unit.
In addition to the objectives of each unit, the overall aims of this course include:
(i) To introduce you to the Understanding of Techniques and Models used in Economic
Planning.
(ii) To teach you the concept of Input-Output Analysis in Plan Programming.
(iii) To expose you to the concept of Linear Programming Techniques in planning.
(iv) To give you the detailed analysis of how Social Accounting Matrix technique is used
in Economic Planning..
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(v) To show you the importance and limitations of General Equilibrium Models and
Computable General Equilibrium Models in Economic Planning.
(vi) To teach you the workings of Cost Benefit Analysis and project selection techniques.
Course Objectives
To achieve the aims of this course, there are overall objectives which the course is out to
achieve though, there are set out objectives for each unit. The unit objectives are included
at the beginning of a unit; you should read them before you start working through the
unit. You may want to refer to them during your study of the unit to check on your
progress. You should always look at the unit objectives after completing a unit. This is to
assist the students in accomplishing the tasks entailed in this course. In this way, you can
be sure you have done what was required of you by the unit. The objectives serves as
study guides, such that student could know if he is able to grab the knowledge of each
unit through the sets of objectives in each one
The objectives of this course are:
executed using the common
quantitative development models for Economic Planning of a country most especially
developing countries by the planning authorities i.e the Government.
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and
techniques of Economic Planning.
Working through This Course
To successfully complete this course, you are required to read the study units, referenced
books and other materials on the course.
Each unit contains self-assessment exercises called Student Assessment Exercises (SAE).
At some points in the course, you will be required to submit assignments for assessment
purposes. At the end of the course there is a final examination. This course should take
about 12weeks to complete and some components of the course are outlined under the
course material subsection.
You have to work through all the study units in the course. There are Four modules and
Twelve study units in all.
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Course Materials
The major component of the course, What you have to do and how you should allocate
your time to each unit in order to complete the course successfully on time are listed
follows:
1. Course guide
2. Study unit
3. Textbook
4. Assignment file
5. Presentation schedule
Study Unit
There are 12 units in this course which should be studied carefully and diligently.
The breakdown of the four modules and twelve study units are as follows:
Module 1: Understanding Techniques, Models and requisites of Economic Planning.
Unit 1: Meaning of models in Economic Planning
Unit II: Rationale and prerequisite for successful planning
Unit III: Categories of development planning models in focus
Module 2: Input-Output Analysis in Planning.
Unit 1: Meaning of Input-Output technique
Unit II Input –Output model
Unit III: Uses, Limitations and importance of input-output analysis to planning
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Module 3 Social accounting matrix, General equilibrium and computable general
equilibrium models of economic planning
Unit 1 Social accounting matrix technique of economic planning
Unit II General equilibrium model of economic planning
Unit III Computable General equilibrium model of economic planning
Module 4: Linear Programming Techniques and Cost-benefit analysis in

Planning.
Unit 1: Introduction to the concept of Linear Programming technique
Unit 2: Linear Programming technique and its application in Planning
Unit 3: Project selection technique of cost-benefit analysis
Each study unit will take at least two hours, and it include the introduction, objective,
main content, self-assessment exercise, conclusion, summary and reference. Other areas
border on the Tutor-Marked Assessment (TMA) questions. Some of the self-assessment
exercise will necessitate discussion, brainstorming and argument with some of your
colleges. You are advised to do so in order to understand and get acquainted with
historical economic event as well as notable periods.
There are also textbooks under the reference and other (on-line and off-line) resources for
further reading. They are meant to give you additional information if only you can lay
your hands on any of them. You are required to study the materials; practice the self-
assessment exercise and tutor-marked assignment (TMA) questions for greater and in-
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depth understanding of the course. By doing so, the stated learning objectives of the
course would have been achieved.
Textbook and References
For further reading and more detailed information about the course, the following
materials are recommended:
Akosile I.O, Adesanya A.S Ajani A.O (2012):- Management of development ( A Nigeria
per spective ) Olas Ventures, Mushin, Lagos.
Jhingan M.L. (2007):- The Economics of development and planning, Vrinda publications
India. (39th Edition).
Michael P. Todaro and Stephen C Smith (2011).Economic development, pearson

education ltd, Edinburgh gate harlow, Essex, England.
Michael P.Todaro: Development planning, models and methods, Chapter 2-3.
Olajide O.T (2004):_ Theories of Economics development and planning, Lagos, Nigeria,
Pumark Nigeria Ltd.
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Otokiti S.O (1999):- Issues and strategies in Economic Planning, Bitico publishers,
Ibadan.
Assignment File
Assignment files and marking scheme will be made available to you. This file presents
you with details of the work you must submit to your tutor for marking. The marks you
obtain from these assignments shall form part of your final mark for this course.
Additional information on assignments will be found in the assignment file and later in
this Course Guide in the section on assessment.
There are four assignments in this course. The four course assignments will cover:
Assignment 1 - All TMAs‘ question in Units 1 – 3 (Module 1 )
Assignment 2 - All TMAs' question in Units 4 – 6 (Module 2)
Assignment 3 - All TMAs' question in Units 7 – 9 (Module 3)
Assignment 4 - All TMAs' question in Unit 10 – 12 (Module 4).
Presentation Schedule
The presentation schedule included in your course materials gives you the important
dates for this year for the completion of tutor-marking assignments and attending
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tutorials. Remember, you are required to submit all your assignments by due date. You
should guide against falling behind in your work.
Assessment
There are two types of the assessment of the course. First are the tutor-marked
assignments; second, there is a written examination.
In attempting the assignments, you are expected to apply information, knowledge and
techniques gathered during the course. The assignments must be submitted to your tutor
for formal Assessment in accordance with the deadlines stated in the Presentation
Schedule and the Assignments File. The work you submit to your tutor for assessment
will count for 30 % of your total course mark.
At the end of the course, you will need to sit for a final written examination of three
hours' duration. This examination will also count for 70% of your total course mark.
Tutor-Marked Assignments (TMAs)
There are four tutor-marked assignments in this course. You will submit all the
assignments. You are encouraged to work all the questions thoroughly. The TMAs
constitute 30% of the total score.
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Assignment questions for the units in this course are contained in the Assignment File.
You will be able to complete your assignments from the information and materials
contained in your set books, reading and study units. However, it is desirable that you
demonstrate that you have read and researched more widely than the required minimum.
You should use other references to have a broad viewpoint of the subject and also to give
you a deeper understanding of the subject.
When you have completed each assignment, send it, together with a TMA form, to your
tutor. Make sure that each assignment reaches your tutor on or before the deadline given
in the Presentation File. If for any reason, you cannot complete your work on time,
contact your tutor before the assignment is due to discuss the possibility of an extension.
Extensions will not be granted after the due date unless there are exceptional
circumstances.
Final Examination and Grading
The final examination will be of three hours' duration and have a value of 70% of the
total course grade. The examination will consist of questions which reflect the types of
self-assessment practice exercises and tutor-marked problems you have previously
encountered. All areas of the course will be assessed
Revise the entire course material using the time between finishing the last unit in the
module and that of sitting for the final examination to. You might find it useful to review
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your self-assessment exercises, tutor-marked assignments and comments on them before
the examination. The final examination covers information from all parts of the course.
Course Marking Scheme
The Table presented below indicates the total marks (100%) allocation.
Assignment Marks
Assignments (Best three assignments out of four that is 30%

marked)
Final Examination 70%
Total 100%
Course Overview
The Table presented below indicates the units, number of weeks and assignments to be
taken by you to successfully complete the course, Economic planning II (ECO 408).
Units Title of Work Week’s Assessment

Activities
(end of unit)
Course Guide
Module 1 Understanding Techniques, Models and requisites of Economic

Planning
1 Meaning of models in Economic Week 1 Assignment 1

Planning
2 Rationale and prerequisite for Week 2 Assignment 1

successful planning
3 Categories of development planning Week 3 Assignment 1

models in focus
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Module 2 Input-Output Analysis in Plannning
1 Meaning of Input-Output technique Week 4 Assignment 2
2 Input –Output model Week 5 Assignment 2
3 Uses, Limitations and importance of Week 6 Assignment 2

input-output analysis to planning
Module 3 Social accounting matrix, General equilibrium and computable

general equilibrium models of economic planning
1 Social accounting matrix technique of Week 7 Assignment 3

economic planning
2 General equilibrium model of Week 8

economic planning
3 Computable General equilibrium Week 9 Assignment 3

model of economic planning
Module 4 Linear Programming Techniques and Cost-benefit analysis in

Planning
1 Introduction to the concept of Linear Week 10 Assignment 4

Programming technique
2 Linear Programming technique and Week 11 Assignment 4

its application in Planning
3 Project selection technique of cost- Week 12 Assignment 4

benefit analysis
Total 12weeks
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How to Get the Most from this Course
In distance learning the study units replace the university lecturer. This is one of the great
advantages of distance learning; you can read and work through specially designed study
materials at your own pace and at a time and place that suit you best.
Think of it as reading the lecture instead of listening to a lecturer. In the same way that a
lecturer might set you some reading to do, the study units tell you when to read your
books or other material, and when to embark on discussion with your colleagues. Just as
a lecturer might give you an in-class exercise, your study units provides exercises for you
to do at appropriate points.
Each of the study units follows a common format. The first item is an introduction to the
subject matter of the unit and how a particular unit is integrated with the other units and
the course as a whole. Next is a set of learning objectives. These objectives let you know
what you should be able to do by the time you have completed the unit.
You should use these objectives to guide your study. When you have finished the unit
you must go back and check whether you have achieved the objectives. If you make a
habit of doing this you will significantly improve your chances of passing the course and
getting the best grade.
The main body of the unit guides you through the required reading from other sources.
This will usually be either from your set books or from a readings section. Some units
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require you to undertake practical overview of historical events. You will be directed
when you need to embark on discussion and guided through the tasks you must do.
The purpose of the practical overview of some certain historical economic issues are in
twofold. First, it will enhance your understanding of the material in the unit. Second, it
will give you practical experience and skills to evaluate economic arguments, and
understand the roles of history in guiding current economic policies and debates outside
your studies. In any event, most of the critical thinking skills you will develop during
studying are applicable in normal working practice, so it is important that you encounter
them during your studies.
Self-assessments are interspersed throughout the units, and answers are given at the ends
of the units. Working through these tests will help you to achieve the objectives of the
unit and prepare you for the assignments and the examination. You should do each self-
assessment exercises as you come to it in the study unit. Also, ensure to master some
major historical dates and events during the course of studying the material.
The following is a practical strategy for working through the course. If you run into any
trouble, consult your tutor. Remember that your tutor's job is to help you. When you need
help, don't hesitate to call and ask your tutor to provide it.
1. Read this Course Guide thoroughly.
2. Organize a study schedule. Refer to the `Course overview' for more details. Note
the time you are expected to spend on each unit and how the assignments relate to
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the units. Important information, e.g. details of your tutorials, and the date of the
first day of the semester is available from study centre. You need to gather
together all this information in one place, such as your dairy or a wall calendar.
Whatever method you choose to use, you should decide on and write in your own
dates for working breach unit.
3. Once you have created your own study schedule, do everything you can to stick to
it. The major reason that students fail is that they get behind with their course
work. If you get into difficulties with your schedule, please let your tutor know
before it is too late for help.
4. Turn to Unit 1 and read the introduction and the objectives for the unit.
5. Assemble the study materials. Information about what you need for a unit is given
in the `Overview' at the beginning of each unit. You will also need both the study
unit you are working on and one of your set books on your desk at the same time.
6. Work through the unit. The content of the unit itself has been arranged to provide
a sequence for you to follow. As you work through the unit you will be instructed
to read sections from your set books or other articles. Use the unit to guide your
reading.
7. Up-to-date course information will be continuously delivered to you at the study
centre.
8. Work before the relevant due date (about 4 weeks before due dates), get the
Assignment File for the next required assignment. Keep in mind that you will
learn a lot by doing the assignments carefully. They have been designed to help
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you meet the objectives of the course and, therefore, will help you pass the exam.
Submit all assignments no later than the due date.
9. Review the objectives for each study unit to confirm that you have achieved them.
If you feel unsure about any of the objectives, review the study material or consult
your tutor.
10. When you are confident that you have achieved a unit's objectives, you can then
start on the next unit. Proceed unit by unit through the course and try to pace your
study so that you keep yourself on schedule.
11. When you have submitted an assignment to your tutor for marking do not wait for
it return `before starting on the next units. Keep to your schedule. When the
assignment is returned, pay particular attention to your tutor's comments, both on
the tutor-marked assignment form and also written on the assignment. Consult
your tutor as soon as possible if you have any questions or problems.
12. After completing the last unit, review the course and prepare yourself for the final
examination. Check that you have achieved the unit objectives (listed at the
beginning of each unit) and the course objectives (listed in this Course Guide).
Tutors and Tutorials
There are some hours of tutorials (2-hours sessions) provided in support of this course.
You will be notified of the dates, times and location of these tutorials. Together with the
name and phone number of your tutor, as soon as you are allocated a tutorial group.
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Your tutor will mark and comment on your assignments, keep a close watch on your
progress and on any difficulties you might encounter, and provide assistance to you
during the course. You must mail your tutor-marked assignments to your tutor well
before the due date (at least two working days are required). They will be marked by your
tutor and returned to you as soon as possible.
Do not hesitate to contact your tutor by telephone, e-mail, or discussion board if you need
help. The following might be circumstances in which you would find help necessary.
Contact your tutor if.
• You do not understand any part of the study units or the assigned readings
• You have difficulty with the self-assessment exercises
• You have a question or problem with an assignment, with your tutor's comments on an
assignment or with the grading of an assignment.
You should try your best to attend the tutorials. This is the only chance to have face to
face contact with your tutor and to ask questions which are answered instantly. You can
raise any problem encountered in the course of your study. To gain the maximum benefit
from course tutorials, prepare a question list before attending them. You will learn a lot
from participating in discussions actively.
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Summary
The course, Economic Planning II (ECO 408), expose you to the field of economic
development planning, in this course, attention has been given to the dynamics and
workings of the techniques and models of economic planning as it relates to the
functionality of the economy for desired Economic growth and development. It is
primarily concerned with the explanations of the models and techniques of Economic
planning that can be adopted by the central authority to exercise their conscious effort of
achieving definite targets and objectives within a specified period of time. In this wise,
Economic planning incorporate all aspect of human development aspirations to accelerate
the pace of a country‘s social, economic and political development. More specifically, it
is a study that shows the technique of deliberate control and direction of the economy ,by
a central authority through various tools and sub-systems within the main system and also
incorporate other technique like input-output analysis, social accounting matrix
technique, linear programming technique, computable general equilibrium model and
cost-benefit analysis for project selection, for the purpose of achieving definite targets
and objectives within a specified period of time.
On successful completion of the course, you would have developed critical thinking skills
with the material necessary for proper economic planning. However, to gain a lot from
the course please try to apply anything you learn in the course to term papers writing in
other economic planning development courses. We wish you success with the course and
hope that you will find it fascinating and handy.
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MODULE 1
Understanding Techniques, Models and Requisites of Economic Planning.
Unit 1: Meaning of models in Economic Planning
Unit II: Rationale and prerequisite for successful planning
Unit III: Categories of development planning models in focus
UNIT 1 Meaning of Models in Economic Planning.

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 What are EconomicPlanning Models?
3.2 Elements in development Planning models
3.3 Types of Planning Models
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings
1.0 INTRODUCTION
You must have read the Course Guide. I also assume that you have familiarized yourself
with the introductory comments in Module 1. This unit is the first among the three
constituents units of this module. The main thrust of this unit is to introduce you to the
meaning of ‗Models of Economic Planning‘ as a concept and expound its elements,
highlight its various types. This unit is fundamental to the understanding of subsequent
units and modules. This is simply because other units and modules will be discussed on
the basis of the fundamental concepts explained here, hence, requires your maximum
attention and understanding.
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2.0 OBJECTIVES
At the end of this unit, you should be able to:
 Define what economic planning models are as scholarly established and in your
own words.
 Enumerate the elements of development planning models to actual development
plan making.
 Identify the types of economic development planning models available.
3.0 MAIN CONTENT

3.1 What are Economic planning models?
Generally, our focus in this course is to understand the meaning of techniques and models
of Economic planning, its applications to achieving set economic development targets of
an actual plan, various types of models available for plan making, its importance and
usefulness. It is important for you to know that planning is essential in whatever we do
both at micro and macro level of human existence. Quantifying what we want to achieved
as set targets and how to realize them given the limited resources at our disposal is of
paramount importance to even the planning authorities i.e. the government forthem to
meet up with the set targets of developing the economy using available resources.This
can only be done using quantitative equations which expresses relationships among
economic variables to explain and predict past and future events under a set of
simplifying assumptions known as Model. Planning models have been increasingly used
in less developed countries of which Nigeria is one, for the drawing up of plans for
economic development. To start with, I consider it important for us to examine what
Planning models is all about. I believe this will provide a convenient platform for us to
have a full grasp of the entire course content.
Let us begin our understanding of the models of economic planning by first defining the
word ‗Models‘.
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According to Jhingan M.L (2011) , a model expresses the relationships among economic
variables which explain and predict past and future events under a set of simplifying
assumptions .In other words a model consist of a series of equations each of which
represents the association among certain variables.
Planning Model therefore is a series of mathematical equations which help in the drawing
up of a plan for economic development. Jhingan M.L (2011).
On the otherhand, Otokiti S.O (1999) views an economic model as an organize set of
relationships, that describes the functioning of an economic entity whether it concerns,
the individual, house hold or firm, the local government system, the regional or national
economies,or the world economy under a set of simplifying assumptions. He also posits
that in the context of planning economic models provide a logically, systematic and
internally consistent operational framework, based on structural inter-relationships of sets
and participants in the economy under consideration. A planning model, in other words
sets out the relationship between the crucial (key) variables inthe process of
plannedeconomic development within the stipulated time horizon of the plan. You
should also know that most planning models belong to the category of what are known
asdecision or policy models. In these models a set of plan objectives is specified, policy
measures to achieve these objectives are isolated and their interrelationship worked out.
It is imperative to let you know that model may have endogenous and exogenous
variables. Endogenous variables are those whose values are determined from within the
system, examples of such are national income. Consumption, savings, investment etc.
On the other hand, exogenous variable are determined from outside the system, Examples
of such are prices, exports, imports, technological changes etc.
Therefore as a student of economics, you should know that a planning model specifies
the relationships between endogenous and exogenous variables ad aims at ensuring the
consistency of the proposed plan for economic development. It is also meant to yield a
optimally balanced collection of measures known as Model Targets which can help the
planning authority in the drawing of an actual. It is also important to let you know that
there are important elements of development models
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Self-AssessmentExercise:Identify other meanings of economic planning models not
mentioned above that can enhance your learning.
3.2 Elements In development planning model.

The following are the important elements of the development planning models.
a. Objectives
b. Instrument Variables
c. The functional Relationships
3.2 (i) Objectives:In a development plan, there should be a focus on what the planning
authority is aiming to achieve within the given time frame of the plan. For example the
achievement of a certain rate of growth, a certain level of employment, or a certain
balance of payment position should specifies in the plan as dependent variables of the
model. Let us consider the vision (20 ! 20 ! 20) i.e making Nigeria to be one of the best
Twenty (20) economiesby the year 2020.Part of the means of a achieving this objective is
to maintain a steady economic growth rate of which it is sustained at the current 7% may
lead to the achievement of the objectives of the vision plan. Therefore objectives have to
be specified by planning authorities in a given economic development plan.
3.2 (ii) Instrument Variables:Instruments are tools for achieving something.

Instrumentvariables are regarded as the policy measures that would be necessary to
achieve the objectives. For example the level of savings and investment in different
sectors, the volume of imports and exports to be achieved, the supply of skills or
workforce for projects to be built up or acquired, to mention but few, are the principal
instrument variables operatives in development planning models. Therefore, let it be
known to you that instrumentvariables are the independent variables of the model and it
has to be specified and expressed in the plan.
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3.2 (iii) The functional Relationship: This is the third element indevelopment planning
model that shows the relationship between the variables in the form of structural
equations of thespecified model. The dependent (endogenous)and the independent
(exogenous) variables have to be functionally expressed in a related form of structural
equations of the specified model. These functional or (casual) relationship would show
the responded of the dependent variable when any design or expected change I the
independent of variables is specified. These functional relationships are expressed in the
firm of co-efficient of the model.
Therefore, it is clear to say that in a policy model underlying a plan, the objectives to be
achieved would be the dependent variables and given the values of the independent
variables i.e. (the policy instruments) and the coefficient, the outcome can be determined
or the equations of the system worked out. You will understand this more when
discussing different types of planning models.
Self-assessment Exercise
The concepts of endogenous and exogenous variables are key in development planning
elements. Discuss
3.3 Types of Planning Models

Having understood what economic planning models and the elements of development
planning models are, It is important for us to discuss the various types of development or
economic planning models available.Most development plans have traditionally been
based initially on some more or less formalized macroeconomic model. Such economy
wide planning model can be divided into three basic categories.
The first category is the aggregate growth, macroeconomic or simple models which
involves macroeconomics estimate of planned or required changes in principal economic
variables. It deals with the entire economy in terms of a limited set of macroeconomic
variables deemed most critical to be determination of levels and growth rates of national
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output; i.e savings, investment, capital stock, exports, imports, foreign aid etc. The model
provides a convenient method for forecasting output (and perhaps also employment)
growth over a three to five year period. Harrod Domar and two gap models are of this
type.
The second category is the multi-sector models. Multi-sector include input-output, social
accounting and computable general equilibrium (CGE) models which ascertain among
other things, the production, resources, employment and foreign exchange implication of
a given set of final demand targets within aninternally consistent framework of inter-
industry product flows. It is a sophisticated approach to development planning in which
the activities of the major industrial sectors of the economy are interrelated by a means of
a set of simultaneous algebraic equations expressing the specific production processes or
technology of each industry. All industries are viewed both as producers of outputs and
users of inputs from other industries. For example, the agricultural sector is both a
producer of output e.g. (wheat) and a user of input from the manufacturing sector e.g.
(machinery, fertilizer), therefore there is interdependence of industry which could lead to
direct and indirect repercussions of planned changes in the demand for the products of
any one industry on outputs, employment, and imports of all other industries can be
traced throughout the entire economy in an intricate web of economic interdependent.
This inter-industry model can be used to determine intermediate material, import, labour
and capital requirements with the result that a comprehensive economic plan with
mutually consistent production levels and resource requirements can in theory be
constructed.
The third stage or category of planning models is the decentralized models. It is the type
that have sector of project level variables which are used to prepare models for individual
sectors or projects. This type of models are useful in the early stages of a country‘s
economic development when information is available for only individual sectors or
projects, project evaluation or project appraisal social cost benefit Analysis are
techniques that fit into this category. The most important component of plan formulation
is the detailed selection of specific investment projects within each sector through ay of
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the decentralized models. You will be exposed in details to the workings of these models
and their co-efficientinsubsequent units and modules.
Self-assessment exercise
Discuss the basic models available in economic development planning formulation in less
developed countries.
4.0 CONCLUSION
From our discussion so far on the Meaning of Models in Economic Planning, we can
infer the following facts:
• For effective Economic development planning of any nation, it must possess a
formidable development planning model upon which the plan is built.
• Planning authorities must have clear objectives with definite time frame,
instrument variables to achieve the policy objectives and functional relationship in the
form of structural equations of the specified models
• The three stages or types of development planning models are aggregate or
macroeconomic models, multi-sector or inter industry models and the decentralized
models.
5.0 SUMMARY
In this unit, we have attempted to show various definitions onmodels and techniques of
economic planning from various scholars of repute. Also, from the point of view of
harmonization, you have learnt that all the definitions agreed to the fact that planning
model is a series of mathematical equations which help in the drawing up of a plan for
economic development. I believe your understanding of this unit has given you a basis
for the understanding of the next unit and infact subsequent modules. I expect you by
now to be anxious of reading more about the need and rationale for planning in less
developed countries which will be duly served in the next unit.
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6.0 TUTOR-MARKED ASSIGNMENT
Submit a one page essay (A4, 1.5 spacing, 12pts, Times New Roman Font) on the
Meaning of economic planning models and the elements in development planning
models.
7.0 REFERENCES/FURTHER READING


Pumark Nigeria Ltd.
Otokiti S.O (1999):- Issnes and strategies in Economic Planning, Bitico publishers,
Ibadan.
28
Unit II
UNIT 1I Rationale and prerequisite for successful Economic Planning.
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Needs for planning in less developed countries
3.2 Usefulness of development models to actual economic planning
3.3 Requirements for a successful planning
4.0 Conclusion
5.0 Summary
1.0 Introduction
Having familiarized yourself with the explicit explanations in the first unit of this
module which discusses what economic planning models are and what it entails.
This unit is the second among the three constituents units of this module. The main
thrust of this unit is to show the rationale and prerequisite for successful economic
planning, It will also highlight the usefulness and importance of development
models to actual economic planning. This unit is also fundamental to the
understanding of subsequent units and modules. This is simply because other units
and modules will be discussed on the basis of the fundamental concepts explained
here, hence, requires your maximum attention and understanding.
2.0 OBJECTIVES
• Show the rationales behind a successful economic planning
• Enumerate the usefulness of development models to actual economic planning.
29
• Identify the need for planning in Less Developed Countries
• List with relevant examples the requirements for a successful planning in less
developed countries of which Nigeria is one.
3.0 MAIN CONTENTS
3.1 Needs for planning in less developed countries
One of the principal objectives of planning in underdeveloped or less developed countries
is to increase the rate of economic development. Let us consider the words of ―Gadgil
D.R‖ planning for development implies external direction or regulation of economic
activity by the planning authority which in most cases identified as the government. As
you know that LDC‘s are characterized with low level of savings, low level of income,
what is prevalence in such countries are poverty ridden people. This visions economic
circle can only be broken by planned development. This can be achieves through
importing capital from abroad know as foreign direct investment (FDI) and localized
force saving to support the level of industrialization.
Therefore, the rationale and the need for planning arises in such countries to achieve he
following.
1. Strengthen the market mechanism
The market mechanism works imperfectly in LDC‘ because of the ignorance and
unfamiliarity with it. This is so because the production factor, money and capital markets
are not organized properly, thus the price system fails to bring about adjustments between
aggregate demand and supply of good and services. Therefore, to remove market
imperfection, to mobilize and utilize efficiently the available resources, to determine the
amount and composition of investment and to overcome structural rigidities, the market
mechanism is required to be perfected in LDC‘s through planning Using a workable
planning model.
2. The necessity of removing unemployment.

Unemploymentis asituation where resources are not fully utilized. Capital is scarce and
labour is in abundance thereby creating the problem of providing gainful employmentand
30
resulting in absence of sufficiententerprises and initiatives. This required an urgent
attention by the planning authority in LDC‘s immediately adopt a planning model that
can salvage the situation.
3. The development of Agricultural sectors ad industrial sectors.

Agricultural sector is known to produce food for household, rawmaterials for industries
and foreign earnings to government when exported abroad. Industrial sector on the other
hand utilizes the raw materials from the agricultural sector for the production of further
finished goods that can be used for infrastructural development like roads, railways,
power stations etc. Therefore there should be a conscious attempt by the LDC‘s planning
authority to have a road map planning model towards the development of their
agricultural and industrial sector.
4. The necessity of removing the nations poverty.

The need for reducing inequalities income and wealth raising per-capital income,
increasing employment opportunities, all round rapid development and national
independence substance requires a careful ad conscious idea of planning targeted through
a planning model that can achieve this. This was seen in the rapid development and
transformation of USSR, a poor country at the time of October revolution.
To sum this up, in the words of professor Gadgil, ―Planning for economic development is
undertaken presumably because the pace of direction of development taking place in the
absence of external intervention is not considered to be satisfactory and because it is
further held that appropriate external intervention will result in increasing considerable
the pace of development and directly it properly.
Self Assessment Exercise
Enumerate and discuss three needs for planning in less developed countries.
31
3.2 Usefulness of development models to actual economic planning.
By now, the relevance of development models to problem of economic planning must
have been clear to you.
The following are the usefulness of development models to economic planning.
a. It provides a framework for checking of consistency or the optimality of the
official plan targets.
b. It provides a framework for the actual setting of targets.
c. It provides a framework for the evaluation and selection of projects.
d. It provides an insight into the structure of the economy and its dynamics to help
better policy decisions.
e. It assists in budget and budgeting control.
f. It helps the preparation of feasible plan.
g. It helps the projection and forecasting of measurable changes.
h. It helps in adjusting competing participants within available time path
i. It helps the planning authorities to know their objectives, instrument variables and
the functional relationship of the variables in the desired plan and low to achieve
it.
j. It gives the planner a clear direction to follow on a projected economic plan.
Self-Assessment Exercise
Briefly explain five relevance of development models to economic planning of your
Country.
3.3 Requirements for a successful planning.

The formulation and success of a plan requires the following
1. Planning Commission: The first pre-requisite for a plan is the setting of a planning
commission which should be organized in a proper way and should consist of
experts like economist,statistician, mathematician, engineer etc to deal with
various aspects of the economy. In Nigeria, it is called National Planning
Commission.
32
2. Statistical Data: A prerequisite for sound planning is a through survey of the
existing potential resources of a country together with its resources. To have a
successful planning in a country statistical data and information with regard to the
available material, capital and human resource are needed.
3. Objectives: There must be a clear objective of what the plan aims at achieving.
The objectives might be to increase national and per capital income, to expand
employment opportunities, to reduce inequalities of income and wealth, to raise
agricultural production or to industrialize the economy etc to mention but few.
4. Fixation of Targets and Priorities: One of the Major requirements for successful
planning is to fix targets and priorities well for achieving the objectives laid down
in the plan. These targets should be global and sectoral. Priorities should be laid
down on the basis of the short and long terms need of the economy keeping in
view the available resources.
5. Incorrupt and Efficient Administration: It should be known to you that an

incorrupt and efficient administration is a strong determinant of successful
planning. This however is lacking in most less developed countries. Competent
administrative staff should be appointed into various ministries which should first
prepare good feasibility reports of proposed projects before embarking on them.
Therefore the secret of successful planning lies more in sensible politics and good
administration.

Discuss at least three requirements for a successful planning in a nation.
33
4.0 CONCLUSION
From our discussion so far on the Rationale and prerequisite for successful Economic
Planning. We deduce the following facts:
 Strengthening the market mechanism in the economy, removing market
imperfections, utilizing available resources efficiently, removing poverty and
unemployment, develop the agricultural and industrial sectors should be a model
road map for economic planning and development.
 The usefulness of development models to actual economic planning involves a
framework for consistency of the plan, actual setting of plan targets, evaluation
and selection of projects, aids better policy decision.
 A successful planning requires a planning commission, proper statistical data
gathering, have a clear plan objectives, fix priorities right and have a corrupt free
economy.
5.0 SUMMARY
In this unit, we have attempted to show the need for planning in Less Developed
Countries of which Nigeria is one, Usefulness of development models to actual economic
planning and the requirements for successful planning. From the point of view of
harmonization of all these rationale, you have learnt that all these are a good model road
map for a successful economic planning and development. I believe your understanding
of this unit has given you a basis for the understanding of the next unit and infact
subsequent modules. I expect you by now to be anxious of reading more about the
categories of development planning models in focus which will be duly served in the next
unit.

Submit a one page essay (A4, 1.5 spacing, 12pts, Times New Roman Font).
In your own understanding, explain the relevance‘s of development models to economic
planning of Nigeria.
34
Akosile I.O, Adesanya A.S Ajani A.O (2012):- Management of development (A Nigeria

Pumark Nigeria Ltd.
Ibadan.
35
Unit III
UNIT III categories of development planning models in focus
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Aggregate or macroeconomic or simple models
3.2 Sectoral and sub-sectoral model of development planning.
3.3 Inter- industry Models of development planning
4.0 Conclusion
5.0 Summary
1.0 Introduction
In our discussions so far with what planning models is all about and entails and the
rationale for planning, there is need for us to look critically at the categories of planning
models and its broad explanation using available quantitative growth models. In this
wise, we shall again be considering explicitly, aggregate or macroeconomic models,
sectoral and subsectoral models and the inter-industry models of development planning. I
will advise that you carefully follow the explanation for easy assimilation of the contents
in this unit. This unit is the third among the three constituents units of this module. The
main thrust of this unit is to show the explicit explanation of development planning
models categories using algebraic and numerical notations for its explanations. Hence it
requires proper concentrations
36
2.0 OBJECTIVES
• Show the quantitative workings of some growth models
• Do some quantitative workings on aggregate or macroeconomic models.
• Do some quantitative workings on sectoral and sub-sectoral models
• Show some quantitative workings on the inter-industry models.
3.0 MAIN CONTENTS

3.1 Aggregate or macroeconomic or simple models
In the earlier unit, this model was not explicitly explained but that will be done in this
unit. As the very name implies, this type of models try to provide solutions to the
development problems in terms of such aggregative variables like consumption,
investment, savings, imports, exports, labour supply, balance of payment etc which you
are familiar with in macroeconomic theory as macroeconomic variables. They are also
regarded as simple in the sense that the complexities involved in sectoral distribution of
resources are done away with. Such macro models are usually used to determine the
value of the instrument variables when the target rate of growth of national output is
given. In the exercise, the ―constraints such as the availability of foreign exchange skilled
labour, taxable capacity etc may also be specified. A good example of this category of
planning model is the Harrod Domar model which shows the determination of the
relationship among the aggregative variables such as savings, investment, labour and
capital productivity rate of growth of population etc which will determine the overall
growth rate of the economy.
In the absence of economic planning in the LDCs, the independence or natural growth
rate may be so slow to result to near stagnation prevalence situation. The task of the
planners is therefore to intimate and influence the aggregative instrument variables ins
these economies and to ensure that the growth rate gets accelerated to a satisfactory and
desired target.
37
Let us now consider the Harrod-Domar model, According to the model, the growth rate
of an economy is determined by the level of net capital formation and its productivity.
Although, the net capital formation and its productivity. Although, the net capital
formation in LDC‘s is constrained by the amount of savings available, savings are a
function of the level of income and productivity of capital is ascertained from the overall
or the global capital output ratio.
Thus, if
s= S/ (The saving/ income ratio)
Y
k= I/ (The Incremental Capital Output ratio)
∆Y
(The growth rate of national income)
g= S/K = S/ / I/ = S/ . ∆Y/ = ∆Y/= S =I
Y∆Y Y I Y
Then, if I= S i.e Investment equals savings
∆Y/ = S/ . I/ = S/ . Y/ = ( ∆Y/ S =I)
Y Y ∆Y ,Y I Y
g= s/kI. This is the growth equation of Harrod Domar Model.
In the above analysis, it shows that given the values of S and K and assuming them to be
constant over the plan period, the growth rate of the economy would be determined by
the ratio s/k. When a near stagnant LDC starts its process of planned economic
development, it saves 5 – 6% of its national products. That was infact the case when
Nigeria first 5 year plan was launched in 1962, the process of its planned economic
development saved about 5.6% of its national product. The (ICOR) Incremental capital
output ratio of such an economy may be between 2% & 4%,; thus if the value of S is
38
assumed to be 6% (0.06) and that of K= 3% (0.03), then growth rate=∆Y/= 0.06 x
100=2%
Y 3
For instance, if the annual growth rate of population (∆p/) is also 2%, we will therefore
have ∆Y/ - ∆p/ =0 p
Y p
This implies that the growth of per capita income would be zero. I want you to know that
it is here planning model would realize that if no effort is made to change the variable of
the system suitably, there would be hardly any improvement in economic welfare and
standard of living of the people. While using this model for plan formulation , it is
natural that changes would have to be made in the strategic variables so as to produce a
plan which would make some visible impacts on the standard of living of the people.
Self-Assessment Exercise
If the value of s is assumed to be 8% and k to be 4%. Calculate the growth rate of the
economy.
3.2 Sectoral and sub-sectoral model of development planning.

The macroeconomic models provide only the first approximations to the problems of plan
formation. They yield the broad aggregative targets and the values of the aggregative
instrument variables. However, in order to make the plan an operational document,
sectoral modelsare presented.
The sectoral models may be Single Sector Project Model (SSPM) or complete main
sector planning models (CMSP).
a. In the case of the former, (SSPM) plan formulation starts from the project levels.
Individual projects are appraised for inclusion in the plan and thus, the
aggregative requirements of the plan are built up through the summation of
projects. For instance, if the saving, investment, imports and skill requirements of
all appraised projects come to an aggregative figurethat is not feasible or difficult
39
to achieve some projects are excluded. Such an approach was followed in Nigeria
and few other developing countries in their earlier plan. Although, such models are
capable of producing an internally consistent and co-ordinated plan but the danger
is that they may yield a plan which is only a collection of sundry projects.
b. The Complete Main-Sector Planning (CMSP) Models, are some sophisticated
form of sectoral models, which divide the whole economy into a few main or
broad sectors, such as public and private sectors, consumption and investment
goods sectors, domestic and exports sectors, agricultural and none agricultural
sectors etc. The investment skills, foreign exchange requirements etc, are worked
out for each main sector and consistent targets are set for each of them.
The analysis that follows is a presentation of a simple main sector planning models.
SIMPLE MAIN SECTOR MODEL: In a simplified main sector model, one, can suppose
that the entire economy is sub-divided into two main sectors, namely (i) the consumption
goods sector and (ii) the investment goods sector.
The two sectors has a total product functions, which is represented with x1 and x2 where;
x1 =the total product of the consumption goods sector.
X2 = the total produced of the investment goods sector and
GDP = the Gross Domestic Product of the economy.
C = denotes, the marginal ( and average) propersity to consume.
S = denotes the propensity of save (and closely related to investment thus, S = I (I – C)
From the equations, a summation of X1 and X2 results to the Gross Domestic Product of
the economy.
Thus, X1 +X2 = GDP and if X1/X2 = C/ I – C and C =0.6, then 0.6/0.4 =3/2.
Now, if the value of C remains constant during the plan, the outputs of the two sectors
will grow at these relative rates 3/2. Consequently, the planner would try to lower the
value of C, so that by saving more, the investment goods sector could grow at a faster
rate.
For example: lowering the value of C would imply.
(1). C/1 –c and C = 0.6 then x1/x2 = 0.6/0.4 = 3/2.
40
(2). C/1-c and C = 0.5 then = x1/x2= 0.5/0.5 =1
(3). C/1 –c and C = 0.4 then = x1/x2 = 0.4/0.6 = 2/3.
Meaning that, the planner would require in the third example, 2 units in total product of
consumption goods sectors to obtain 3 units in investment goods sector.
Examine and discuss the sectoral and sub sectoral models available to economic planners.
3.3 THE INTER – INDUSTRY MODELS:

You may have heard about the input – output technique which will be elaborately
discussed in the next module. The inter – industry models, make use of the technique and
some of them make use of even linear programming.
As it will be observed in the next module, the input – output table gives a synoptic view
of the inter – industry relations and transaction. It is however, necessary for building up
input- output tables that two conditions are satisfied as pre –requisites, these are:
i. That a country should have developed at least a few manufacturing industries, so
that the inter – industry transactions are quite substantial.
ii. That sectoral data should be available so as to facilitate the construction of input –
output tables. Thus, only those LDCs satisfying these conditions should rely upon
inter – industry models in their plan formulation.
Whenever it is practicable to build inter – industry models ( using input – output
technique ), these turn out to be the most elaborate ones and can be really termed as
multisectoral models. The entire economy is divided into as many sectors or industries
for as many as the requisite data can be mustered.
3.3.1.THE STATIC PLANNING MODEL:

Let us look at a static planning model of this type. The objective of such a model may be
to ensure consistency among sectoral output at a future date, say, end of the five years
plan period, (4+x). Using the input – output technique which you will be familiar with
41
and its table happens to be the centre piece. If you look at table that will be presented,
you will notice that each sectorial row gives a relationship of this type.
X1 = ∑xij + X1C + X1l + X1X
Where
X1 = total output of section i
∑ Xij = is the total delivery of goods from i sectors
J =1 (which are 4 in number)
X1C = use of sector‘s output for consumption.
X1l =use of sector‘s output for investment and
X1 = exports of i sector‘s output.
Such a disposal of sectorial outputs can be expressed for all the n sectors that would be
there in a table.
Now, as stated above, if the objective of constructing such a model is to ensure
consistency in sectoral outputs in a target year (t + x), we can proceed like this.
- Given that the input coefficients of different sectors is already known ( from the
input output table of the base year).
- The deliveries of goods from one sector to the other can be related in the year as
follows
Xij = aijXj
Where
aij is the input coefficient of j sectors and expresses the unit of i goods needed to
produce one unit of j goods.
Now, ∑xaij + X1C + X1lX1X ( l = 1.2 ………….. n) ….(iii)
j=i
Equation (ii), therefore, shows that if X1C, X1l and X1X are exogenously
(independently) determined, then the output of sectors i needed for inter –
industry deliveries (Xij) in year t+x can also be determined. This equation,
therefore, becomes a system of n simultaneous equations ( each equation for a
sector) in n unknown variable which can be solved. With the help of such a static
42
model, the planner can explicitly lay –down production targets in such industry
and sectors.Other models like the input output model, social accounting matrix
and computable general equilibrium model will be explicitly discussed in the next
modules.
What do you understand by inter-industry model?
4.0 CONCLUSION
From our discussion so far on the categories of development planning models in focus.
We can conclude as follows:
 That the aggregative or simple models try to provide solutions to the development
problems in terms of such aggregative variables like consumption, investment,
savings, imports, exports, labour supply, balance of payment etc dealing with
complexities of sectoral distribution and that Individual projects are appraised for
inclusion in the plan and thus, the aggregative requirements of the plan are built
up through the summation of projects.
 That a country should have developed at least a few manufacturing industries, so
that the inter – industry transactions can be quite substantial and that sectoral data
should be available so as to facilitate the construction of input – output tables.
Thus, only those LDCs satisfying these conditions should rely upon inter –
industry models in their plan formulation.
5.0 SUMMARY
In this unit, we have attempted to show the categories of development planning models
comprising Aggregate or macroeconomic or simple models , Sectoral and sub-sectoral
model of development planning and the Inter- industry Models of development planning.
You have learnt that all these model are useful and important in making a viable road
map for a successful economic planning and development . I believe your understanding
43
of this unit has given you a basis for the understanding of the next unit and infact
subsequent modules. I expect you by now to be anxious of reading more abouttheinput -
output analysis which will be critically treated in the next module.

Discuss your understanding of Single Sector Project Model (SSPM) and the Complete
Main-Sector Planning (CMSP) Models to actual economic planning.


Pumark Nigeria Ltd.
Ibadan.
44
MODULE 2
INPUT- OUTPUT ANALYSIS IN PLANNING
Unit 1: Meaning of Input-Output technique
Unit II Input –Output model
Unit III: Uses, Limitations and importance of input-output analysis to planning
UNIT 1 MEANING OF INPUT-OUTPUT TECHNIQUE

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 what is input-output technique ?
3.2 Essential features of input –output technique.
3.3 Assumptions of the input –output technique.
4.0 Conclusion
5.0 Summary
1.0 INTRODUTION
Our discussion in the first module of this course was too general and aggregative in
nature. Similarly, we referred to the necessity of a plan being consistent; Therefore our
task in the present module would be to look at the process of plan formulation at a
somewhat disaggregated level. For the above reasons, we shall familiarize ourselves with
the methods that are usually adopted at the operational level to make physical as district
from financial targets of the plan consistent with each other, so that both surpluses and
shortages could be avoided. It is therefore intended to introduce you to what input-output
analysis in plan programming is all about, it‘s essential feature, assumptions and its
usefulness and importance in planning.
45
2.0 OBJECTIVES
• State what input-output technique is all about.
• Show the essential features of input –output technique.
• Highlight the assumptions of the input –output technique.
3.0 MAIN CONTENTS

3.1 what is input-output technique.
In considering what input-output analysis is all about, we must consider its genesis and
how it originated .Input-output is a novel technique invented by prof.Wassily .W.Leontief
a nobel prize winner in economics in 1951
It is a technique used to analyse inter-industry relationship in order to understand the inter
dependencies and complexities of the economy and thus the conditions for maintaining
equilibrium between supply and demand. It is also known as inter-industry analysis.
According to Michael P. Todaro and Stephen C,Smith (2011), Input-output is defined as
a formal model dividing the economy into sectors and tracing the flows of inter industry
purchases (input) and inter industry sales (output).Before analysing the input-output
method, Let us understand what the terms input and output means. According to prof.
J.R. Hicks, an input is something which is bought for the enterprise, while an output is
something which is sold by the enterprise. An input is obtained but an output is produced.
This input represents the expenditure of the firm while output is receipts accrued to the
firm. The sum of the money values of inputs is the total cost of a firm and the sum of the
money values of the output is its total revenue. The input –output analysis tells us that
there are industrial inter relationships and inter dependencies in the economic system as a
whole. Let it be known to you that the inputs of one industry are the outputs of another
industry and vice versa, so that untimely their mutual relationships lead to equilibrium
between supply and demand in the economy as a whole for example, coal is an input for
steel industry and steel is an input for coal industry, although both are the outputs of their
respective industries. A major part of economic activity consists in producing
46
intermediate goods (inputs) for further use in producing final goods (outputs).There are
flows of goods in whirlpools and cross currents between different industries. The supply
side consists of large inter-industry flows of inter mediate products and the demand side
of the final goods, In essence, the input-output analysis implies that in equilibrium, the
money value of aggregate output of the whole economy must equal the sum of the money
values of inter-industry inputs and the sum of the money values of inter-industry outputs.
The quantitative step by step of this analysis shall be considered and discussed in the
subsequent unit of this module.
SELF ASSESSMENT EXERCISE:-

Briefly, explain what input-output analysis is all about in your own words.
3.2 Essential features of input –output technique.

Features as you know are related to the characteristics of a particular thing under
observation. It is the visible identify or identification associated with what one is
considering or looking out for. The following are the visible and main features of the
input- output technique as it relates to economic planning and development. The input –
output analysis is the finest variant of general equilibrium which has the following main
elements.
i The input –output analysis concentrates on an economy which is in equilibrium.
ii The input- output analysis is not applicable to partial equilibrium analysis.
iii. The input –output analysis does not concern itself with the demand analysis.
iv. Input- output analysis deals exclusively with technical problems of production.
v. Input –output analysis is based on empirical investigation.
SELF ASSESSMENT EXERCISE:
Highlight the basic features of input –output technique that you know.
3.3 Assumptions of the input –output technique.

This analysis is based on the assumptions highlighted as follows :
47
i. The whole economy is divided into two sectors i.e. inter- industry sector and final
demand sector both being capable of sub-sectorial division.
ii. The total outputs of any inter- industry sector is generally capable of being used as
inputs by other inter- industry sectors, by itself and by final demand sectors.
iii. No two products are produced jointly. Each industry produces only one
homogenous products.
iv. Prices, consumer demands and factors supplies are given.
v. There is constant return to scale.
vi. There are no external economies or diseconomies of production.
vii. The combinations of inputs are employed in rigidly fixed proportions.
viii. The inputs remain in constant proportion to the level of output.
ix. There is no substitution between different materials and no technological progress.
x. There are fixed input coefficients of production.

Highlight the main assumption of input-output technique known to you.
4.0 CONCLUSION
From our discussion so far on the meaning of input-output technique
 Input-output is defined as a formal model dividing the economy into sectors and
tracing the flows of inter industry purchases (input) and inter industry sales
(output). It is also known as inter-industry analysis.
 The input –output analysis concentrates on an economy which is in equilibrium. It
is not applicable to partial equilibrium analysis and does not concern itself with
the demand analysis.
48
5.0 SUMMARY
In this unit, we have attempted to show the meaning of input-output technique, covering
what is input-output technique is all about, showing the essential features of input –output
technique and highlighting the assumptions of the input –output technique. You have
learnt that input-output model is also known as inter –industry model which rely solely
on available industries for its workability. Your understanding of this unit i expect should
encourage you to be familiar more with the topics in this module as you read ahead
against the next unit.

Discuss briefly the meaning and features of input-output technique.
49

Pumark Nigeria Ltd.
Otokiti S.O (1999):- Issues and strategies in Economic Planning, Bitico publishers,
Ibadan.
50
UNIT II
INPUT – OUTPUT MODEL.
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Input-output table
3.2 Feasibility and consistency in planning.
3.3 Matrix of technical coefficient of production.
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION.
It is good that we have familiarized ourselves with what input-output analysis, technique
or model is all about in the preceding unit which provides a basic foundational platform
that we shall be looking at in this unit. In this unit, we shall be looking at the input-
output model table, feasibility and consistency of the plan, input-output coefficients, the
Leontief solution, the dynamic input- output model. An in-depth explanation of the above
topics shall be provided. It is advisable that you critically concentrate as we move along
with explanations that will be given.
2.0 OBJECTIVES
• Interprete, draw and decode the input-output table .
• Understand the Feasibility and consistency in planning .
• Understand the Matrix of technical coefficient of production calculations and the
Leontief solutions.
51
3.0 MAIN CONTENTS
3.1 INPUT –OUTPUT TABLE.
The input- output table relates to the economy as a whole in a particular year. The table
shows the values of the flows of goods and services between productive sectors
especially inter –industry flows. For proper understanding, a three (3) sector economy is
taken in which there are two inter –industry sectors, agriculture and industry and one
final demand sector. Look at the table below, it is called the input- output table which
provides a simplified picture of such economy.
Table 2.1.INPUT – OUTPUT TABLE.

( in value terms ) ( ―m‖).
PURCHASING SECTORS
SECTORS input in agric input in industry final demand total output/revenue
Agriculture 50 150 100 300
Industry 100 250 150 500
Value added# 150 100 0 250
Total input or total cost 300 500 250 1050
Value added refers to payments to the factors of production.
In the above table 2.1, the total output of the industrial, agricultural and household sectors
is set in rows. And divided into the agricultural, industrial and final demand sectors. The
inputs of these sectors are set in columns. Take a look at the first row total which shows
that altogether the agricultural output is valued at 300 million per year. Out of this total
100 million go directly to final consumption i.e. individual household and government as
shown in the third column of the first row. The remaining output from agriculture goes as
inputs, 50 back to agriculture and 150 to industry.similarly, the second row shows the
distribution of the total output of the industrial sector values at 500 million per year.
Columns 1,2, and 3 show that 100 units of manufactured goods go as inputs to
52
agriculture, 250 unit to industry itself and 150 unit for final consumption to the
household sector. Let us take the columns ―read it downward‖, the first column describe
the input or cost structure of agriculture industry. Agricultural output valued at
300million is produced with the use of agricultural goods worth 50million, manufactured
goods worth 100 and labour or management services valued at 150. In other words, it
cost 300 million to get a revenue of 300million from the agricultural sector.(50+100+150
= 300). Similarly, the second column explains the input structure of the industrial sector
i.e ( 150+ 250 +100 =500). The third column corresponding to this column is the final
demand column which shows what is available for consumption and government
expenditure. The third row corresponding to this column indicated zero. This implies that
household sector is simply a spending (consuming) sectors that does not sell anything to
itself. This means that labour is not directly consumed.
SELF ASSESSMENT EXERCISE: Construct an input- output table indicating a three

sector inter industry flow of a three sector economy.
3.2 FEASIBILITY AND CONSISTENCY IN PLANNING.

It should be noted that a plan should have a level of feasibility and consistency for it to
survive. An economy behaves and assumes a certain pattern of flows of resources in two
ways which are:
1. The internal consistency or balance of each sector of the economy i.e. survival
within the economy.
2. The external stability of each sector or inter- sectoral relationship i.e. survival
outside the sector. This according to Leontief is regarded as ―fundamental relationship
of balance and structure‖. It is also known as ―balance equations‖ and ―structural
equation‖ when expressed mathematically. If the total output of say xi of the ith
industry is divided into various number of industries, 1,2,3, n, then we have the
balance equation: xi = xi1 + xi2 + xi3 + ------ xin +Di--------------- (1)
53
and if we take into consideration, the amount say yi absorbed by the ―outside
sector‖, the balance equation of the ith industry becomes.
Xi = xi1 +xi2 + xi3 +------- xin + Di + Yi
OR
∑xij + Yi = xi --------------------------------(2).
J=i
It is to be noted that Yi stands for the sum of the flows of the products of the iyh
industry, to consumption, investment exports and net of imports etc. It is also
called the ―final bill of goods‖ which is the function of the output to fill. The
balance equation shows the conditions of equilibrium between demand and
supply. It shows the flows of outputs and inputs to and from one industry to other
industries and vice versa.
Let it be known to you that the system of balance equations in the analysis
presents the conditions of internal consistency of a plan. The plan would not be
feasible without them because if these equations are not satisfied, there might be
excess of some goods and deficiency of others. Since xi2 stands for the amount
absorbed by industry 2 of the ith industry, it follows that xij stands for the amount
absorbed by the jth industry of ith industry. Thus the ―input or technical
coefficient‖ of the ith industry is denoted by: aij = xij---------(3)
Xj
Where xij is the flow from industry I to industry j, xj is the total output of industry
j and aij as already indicated above as a constant called technical coefficient shows
the number of units of one industry‘s output that are required to produce one unit
of another industry‘s output.
Equation (3) is called a structural equation which tells us that the output of one
industry is absorbed by all industries so that the flow structure of the entire
economy is revealed.
54
SELF ASSESSMENT EXERCISE: What do you understand by consistency in
planning?
3.3 MATRIX OF TECHNICAL COEFFICIENT OF PRODUCTION.

The matrix of technical coefficient of production for any input – output table
with (n) sectors would consist of nxn elements. In our example, there are two
sectors, which means a 2x2 technical coefficients of the matrix would be arranged
symbolically as follows. Look at the table below
TABLE 2.2 TECHNOLOGY MATRIX A.
Agriculture Industry
Agriculture a11 a12
Industry a21 a22
If we use equation (3) to calculate the aij for our example of the above two sector
input- output table in 2.1, we will get the following technology matrix.
TABLE 2.3 TECHNOLOGY COEFFICIENT MATRIX A
Agriculture Industry
Agriculture 50/300 =.17 150/500 =.30

Industry 100/300 =.33 250/500 =.50
To get these input coefficients, we will divide each item in the first column of
table 2.1 by its row total, and each item in the second column by the second row
and soon. You should understand that each column of the technological matrix
reveals how much agricultural and industrial sectors require from each other to
55
produce a naira‘s worth of agricultural output requires inputs worth 33 kobo from
industries and worth 17 kobo from agriculture itself.
3.3.1 THE LEONTIEF SOLUTION

This is a solution that can be used to measure the direct and indirect effects on the
entire economy of any sectoral change in total output of final demand. For the
purpose of elaborate explanation, the above table can be utilized to measure these
effects. We have the following.
Again using equation (3)
aij =xij/xi
When you cross multiply we will have
xij =aij. Xi
By substituting the vbalue of xij into equation (2) and transposing terms, we will
obtain the basic input – output system of equations as follows.
xi-∑n aij xi = Yi
i =1
In terms of our two –sectors economy, there would be two linear equations that
could be written symbolically as follows.
X1- a11 xi –a12x2 =Y1
X2 –a21x1 –a22x2 =Y2
The above symbolic relationship can be shown in matrix form as follows
X –[A]X =Y
X[I-A] =Y
Where matrix (I-A) is known as the Leontief matrix
(I–A)-1(I-A)X=I(I–A)-1Y
X = ( I – A) -1 Y [ (.. I – A )-1 ( I –A)]
Thus,we can have the identify marrix as follows i.e. I
I = [1 0]
[0 1]
56
Hence, [X1] =[ 1 0] –[A]-1 [Y1]
[X2]= [0 1]- [Y2].
Therefore, to have a numerical solution, we will make use of our technology
matrix table 2.3 thus
A = [.1.3] and Y = [100]
[.3.5] [150]
( I –A ) = [.9 -.3]
[.3 -.5]
The value of inverse = Adjoint/Determinant = Adj/ [A]
[Aij] =[.5 .3]
[.3 .9]
By transposing we will have:
Aij = [.5 .3]
[.3 .9]
The value of determinant will now be
=.9(.5) – (-.3)(-.3)
=45 -.09 =.36
Hence [X1] = 1/.36 [.5.3] [100]
[X2] [.3.9] [150].
Thus, the total of agricultural sector (x1) will be equal to

=.5x100 +.3x150 /.36 = 264.
The total output of industrial sector (x2) as well will be
=.3x100 + .9x150/.36 = 458.
SELF ASSESSMENT EXERCISE: Explain your understanding of the Leontief
solution using any numerical values for your explanations.
57
4.0 CONCLUSION
From our discussion so far on the input-output table analysis
 Value added refers to payments to the factors of production. From the table , the
total output of the industrial, agricultural and household sectors are set in rows
while the agricultural ,industrial and final demand sectors inputs of these sectors
are set in columns.
 A plan should have a level of feasibility and consistency for it to survive. An
economy behaves and assumes a certain pattern of flows of resources through
internal and external consistency or balance of each sector of the economy.
5.0 SUMMARY
In this unit, we have seen the input-output technique table `, the Feasibility and
consistency in planning and the Matrix of technical coefficient of production calculations
and the Leontief solutions.
You have learnt the workings of input-output model using matrix algebral. Your
understanding of this unit will usher you into the next unit which discuss the uses,
limitations and importance of input-output technique to economic planning. I expect you
to read ahead against the next unit.

Discuss your understanding of Feasibility and consistency in planning.
58

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NIT III
USES, LIMITATIONS, AND IMPORTANCE OF INPUT –OUTPUT TO PLANNING.
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Uses of input – output models in development planning formation
3.2 Limitations and problems of input - output Analysis
3.3 significance of input - output models in development planning as listed by united
nation‘s studies
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In this unit, attention will be given to the uses of input- output analysis technique in
planning, limitations of the input- output technique to planning and the importance of
input-output technique to the planning of less developed countries like Nigeria.
2.0 OBJECTIVES
• Know the uses of input-output analysis in plan formulations .
• Highlight the limitations and problems of input-output analysis .
• Understand the significance of input-output model in development planning as
listed by the United Nations.
3.0 MAIN CONTENTS

3.1 Uses of input – output models in development planning formation.
60
The following are the uses of input –output analysis.
1. They provide for individual branches of the economy‘s estimates of production
and import levels. That are consistent with each other and with the estimates of
final demand.
2. The solution to the model aids in the allocation of the investment required to
achieve the production levels in the programme and it provides a more accurate
test of the adequacy of available investment resources.
3. Since inputs are considered proportional to outputs, this technique helps in
determining the amount of inter- industry flows of goods and services in less
developed countries.
4. It helps in reducing the need for collecting and computing vast statistical data
since constant flow and capital coefficients has been assumed.
5. It helps in identifying a moving equilibrium of outputs
6. It helps the planner to see more clearly the implications of raising the level of
investment in a particular sector given the requirements of inter –sectoral
balancing.
7. It is also used for national economic planning of a nation.
8. It provides the necessary information about the structural coefficients of the
various sectors of the economy during a period of time which can be utilized for
the optimum allocation of the economy‘s resources towards a desired end.
9. The dynamic model is particularly helpful in a developing economy to determine
the impact of different growth rates of the various sectors of the economy and thus
choose the most desired one.

Mention at least seven uses of input – output model to economic development
planning of a nation.
61
3.2 Limitations and problems of input - output Analysis.
There is no useful model that does not have its own limitations or short comings. So is
the case of input-output model as well. The following are the limitations and short
comings or problems of input-output model.
1. Its framework rests on Leontief‖s basic assumption of constancy of input co-
efficient of production which was split up above as constant returns to scale and
technique of production which holds good in a stationary economy and constant
technique of production in stationary technology.
2. It does not treat the inter- industry analysis dynamically.
3. It tells us nothing as to how technical coefficients would change with changed
conditions.
4. Some industries may have identical capital structures, some may have heavy
capital requirements while others may use no capital, such variations make the
assumption of constant co-efficients of production unrealistic.
5. The assumption of fixed co-efficients of production ignores the possibility of
factor substitution.
6. The assumption of linear equations, which relates outputs of one industry to inputs
of others, appears to be unrealistic, since factors are mostly indivisible, increase
inputs.
7. The input- output model cannot reflect increasing costs due to its rigidity
bottlenecks.
8. It does not tells us why the inputs and outputs are of a particular pattern in the
economy because of its restriction on production side of the economy.
9. It fails to utilize all the factors proportionately or need more than their available
supply.
10. There is no mechanism for price adjustment in the input/output analysis which
makes it unrealistic.
11. The input / output model thrives on equations that cannot be easily arrived at
therefore making it difficult and abstract.
62
12. Large reliable data are not always available in many less developed countries to
construct input - output table.
13. In smaller countries, only few industries or sectors exist and the input / output
table is of little use.
14. In case of a subsistence agricultural sector, labour is the only input, and output
sold in the market sectors is insignificant while commercial crops are sold to the
consumption sector which does not need the input / output table.
15. It is only useful in a large economy where the number of industries or sectors is
large for inter industry transactions to take place and for reliable statistical
information to be available.

Enumerate the problems or limitations of input -output analysis known to you.
3.3SIGNIFICANCE OF INPUT - OUTPUT MODELS IN DEVELOPMENT.

PLANNING AS LISTED BY UNITED NATION’S STUDIES.
The united nations identified and listed some significance of input - output models in
development planning. These are highlighted below.
1.The U.N. posits that the analysis of import requirements and substitution
possibilities is facilitated by the knowledge of the use of domestic and imported
material in different branches of the economy.
2. The U.N stated that, In addition to direct requirements of capital, labour, and
imports, the indirects requirements in other sectors of the economy can also be
estimated.
3. Another major significance of input / output models in development planning as
posited by the United Nations study was that they provide for individual branches of
the economys estimates of production and import levels that are consistent with each
other and with the estimates of final demand.
63
4. The U.N also highlighted that the solution to the model aids in the allocation of the
investment required to achieve the production levels in the programme and provides
a more accurate test of the adequacy of available investment resources.
5. The requirements for skilled labour can be evaluated for planning purposes to
explore the implications of development programmes for the particular region
concerned as well as for the economy as a whole.
7. They are primarily applicable in economics that have achieved a certain degree of
industrial development and thus have a substantial volume of inter industry
transactions.
8. They are significant and useful for national economic planning.
4.0 CONCLUSION
From our discussion so far on the Uses ,limitations and importance of input-output
analysis to planning. We can conclude that:
The uses of input-output model were that ,They provide for individual branches of the
economy‘s estimates of production and import levels,that are consistent with each other
and with the estimates of final demand.Since inputs are considered proportional to
outputs, this technique helps in determining the amount of inter- industry flows of goods
and services in less developed countries.
5.0 SUMMARY
In this unit, we have examined the uses of input- output analysis technique in
planning, limitations or problems of the input- output technique to planning and the
importance of input-output technique to the planning of less developed countries as
listed by the United Nation. It can therefore be concluded that input-output analysis
are significant and useful for national economic planning . I strongly believe that your
understanding of this unit and module will usher us into the next module which
discusses the Social Accounting Matrix. I expect you to read ahead as you prepare for
the next module.
64
Enumerate and discuss the problems or limitations of input -output analysis known to
you .
65

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66
MODULE 3
SOCIAL ACCOUNTING MATRIX , GENERAL EQUILIBRIUM AND

COMPUTABLE GENERAL EQUILIBRIUM MODELS OF ECONOMIC
PLANNING
Unit 1 Social accounting matrix technique of economic planning
Unit II General equilibrium model of economic planning
Unit III Computable General equilibrium model of economic planning
UNIT 1 SOCIAL ACCOUNTING MATRIX TECHNIQUE OF ECONOMIC

PLANNING
CONTENTS
1.0Introduction
2.0 Objectives
3.0 Main Content
3.1 What is Social Accounting Matrix (SAM) ?
3.2 Origin and Structure of Social Accounting Matrix
3.3 Uses of Social accounting matrix for macroeconomic planning
4.0 Conclusion
5.0 Summary
I.0 Introduction:
Our discussions from preceding modules had introduced to us what we need to know
about models used in proper economic planning of nations. There is no country, whether
developed or Less developed that has not in one way or the other made use of models that
67
is useful for their economic plan. Another model or models that we will be concerned
with in this module is the Social Accounting Matrix, Computable general equilibrium and
the general equilibrium models. Therefore , our discussion in this module will describe
the basic structure of social accounting matrix, Computable general equilibrium and the
general equilibrium and investigates how they are used in macroeconomic planning of
Less Developed Countries of which Nigeria is one.
In this unit, we shall be looking at the Social Accounting Matrix, its structure and its
usefulness to effective economic planning of nations.
2.0 OBJECTIVES
At the end of this unit, you should be able to;
 Define what Social Accounting Matrix (SAM) is as scholarly established in your

own words.
 Know the origin and structure of Social accounting matrix .
 Identify the uses of Social accounting matrix for macroeconomic planning of
developing nations.
3.0 MAIN CONTENTS
3.1 What is Social Accounting Matrix (SAM) ?:

―A social accounting matrix is simply defined as a single entry accounting system
whereby each macroeconomic account is represented by a column for outgoings and a
row for incomings‖
Round, (1981). Social Accounting Matrix (SAM) is a technique related to national
income accounting, providing a conceptual basis for examining both growth and
distributional issues within a single analytical framework in an economy. It can be seen
68
as a means of presenting in a single matrix the interaction between production, income,
consumption and capital accumulation. Although a number of SAM‘s were developed for
a number of developing countries in the 1970s, since the 1980 and 1990s, there has been
an increasingly growing interest in the designing, constructing and use of SAM in these
countries especially in the 20th century. It is represented in the form of a square matrix
with rows and columns, which brings together data on production and income generation
as generated by different institutional groups and classes, on the one hand, and data about
expenditure of these incomes by them on the other.
In a SAM, incomings are indicated as receipts for the row accounts in which they are
located and outgoings are indicated as expenditure for their column accounts. Since all
incomings must be, in a SAM, accounted for by total outgoings, the total of rows and
columns must be equal for a given account.
Taylor (1983) sees the SAM as a tabular presentation of the mask in Macroeconomic
Policy and Planning in Developing Countries accounting identities, stating that
incomings must be equal to outgoings for all sectors of the economy.
Let it be known to you that SAM is a data system, including both social and economic
data for an economy. The data sources for a SAM, comes from input-output tables,
national income statistics, and household income and expenditure statistics. Therefore, a
SAM is broader than an input-output table and typical national account, showing more
detail about all kinds of transactions within an economy. However, an input-output table
records economic transactions alone irrespective of the social background of the
transactors.
A SAM, on the contrary in the national accounts, ―... attempts to classify various
institutions to their socio-economic backgrounds instead of their economic or functional
activities‖ Chowdhury & Kirkpatrick, (1994).
A SAM is a way of logical arrangement of statistical information, concerning income
flows in a country‘s economy within a particular time period (usually a year). It can
provide a conceptual basis to analyse both distributional and growth issues within a
69
single framework. For instance, a SAM shows the distribution of factor incomes of both
domestic and foreign origin, over institutional classes and re-distribution of income over
these classes. In addition, it shows the expenditure of these classes on consumption,
investment and savings made by them.
According to King, (1988) he points out that a SAM has two main objectives. Firstly,
organising information about the economic and social structure of a country over a period
of time and secondly, providing statistical basis for the creation of a plausible model
capable of presenting a static image of the economy along with simulating the effects of
policy interventions in the economy.
In the same vein, a Social Accounting Matrix (SAM) is a summary table, which refers to
a given period, representing the production process, income distribution and
redistribution which occurs between sectors, factors of production, actors in an economic
system and the "Rest of the World" (ROW), meaning, all actors outside the economic
system were being studied.
SAM represents the whole economic system, it highlights the interlinkages and the
circular flow of payments and receipts among the different components of the system
such as goods, activities, factors, and institutions. SAM has three main aims;
1) organise the information on the social and economic structure of a country for a
given period;
2) provide a synoptic view of the flows of receipts and payments in an economic
system; and
3) form a statistical basis for building models of the economic system, with a view to
use this to simulate the socio-economic impact of policies.
Self Assessment Exercise;

What do you understand by Social Accounting Matrix ?
70
3.2 Origin and Structure of Social Accounting Matrix
As you know that there is no invention without an inventor i.e the originator of the said
invention, the same is applicable to Social Accounting Matrix. Social Accounting
Matrices were originally developed at the ―Cambridge Growth Project‖ in Cambridge,
UK, which developed the first [SAM] in 1962, Stone and Brown, (1962). They were built
as a matrix representation of the national account, and came to the World Bank with
Graham Pyatt in the 1960s (Pyatt had worked for Richard Stone at the Cambridge
Growth Project). Pyatt left Cambridge and ―developed SAMs, mainly at the World
Bank‖ together with the leading proponents and developers of SAMs named Erik
Thorbecke.
"By the early 1980s, CGE models were heavily ensconced as the approach of the World
Bank for development analysis. Social Accounting Matrices (SAMs) were similarly a
mainstay of Bank analysis, which had been adopted as a presentational device by the
CGE modelers" Mitra-Kahn, (2008). It is therefore important for us to look at its
structure and how it is arranged.
Let us look at it from an accounting perspective, the SAM is a two-entry square table
which presents a series of double-entry accounts whose receipts and outlays are recorded
in rows and columns respectively. Accounts usually refer to the following:
a) Goods and services: these accounts depict the origin of final goods available in the
economic system (production activities and imports) and their destination
(activities as intermediate inputs and institutions.
b) Production activities: these are basically the production activities of the economy
being analysed and generally refer to the defined sectors.
c) Factors of production: these accounts depict receipts from productive activities,
which pay for factor services, and payments to institutions, which provide those
services. They are usually distinguished in labour and capital, but may refer also to
natural resources, such as land and water.
71
d) Institutions i.e. (economic agents), normally comprising households,
companies(corporations) and the government. These accounts record incomes of
institutions along the rows and expenditure on the columns.
e) The capital account or saving-investment or accumulation account, which records
allocation of resources for capital formation and use of these resources for the
purchase of investment products and building up stocks of goods.
f) The rest of the world account or external account, in which the row records
payments received by the rest of the world from the economic system and the
column records the outlays of the rest of the world towards the economic system.
Each category is then normally split into several more detailed accounts which will be
shown in specific rows and columns.
Here, it must be stressed that the sequence of accounts in rows and columns are identical.
Regarding recording different flows in one SAM, all receipts from an account are
recorded in one row (i) and expenditure in one column (j). In this way, all monetary flows
(sij) in a cell
SAM's are square in nature i.e (columns equal rows) in the sense that all institutional
agents (Firms, Households, Government and 'Rest of Economy' sector) are both buyers
and sellers. Columns represent buyers (expenditures) and rows represent sellers
(receipts). SAM's were created to identify all monetary flows from sources to recipients,
within a disaggregated national account. The SAM is read from column to row, so each
entry in the matrix comes from its column heading, going to the row heading. Finally
columns and rows are added up, to ensure accounting consistency, and each column is
added up to equal each corresponding row. In the illustration below for a basic open
economy, the item C (consumption) comes from Households and is paid to Firms.
72
Table 3.1
Illustrative Open Economy SAM:

Goods & Production Factors Resident Information (4) Savings (Row) TOTAL
Services (1) activities (3)
Investmen Rest of
(2)
Labour Capital Household Firms Public ts (5) the
world
Service Sector
(6)
s
Goods and Trade/Transport Intermediat Final cons. Final cons. Investmen Export Deman
Services Margin e Hous. of P.S t& d of
(1) Consumpti various goods
on stocks
Productions Domestic Inflows

Services Production of
(2) activitie
s
Factors Labou Wages & Labour Labour

(3) r Salaries income income
from s
ROW
Capit Earn b. Capital

al Taxes income
(EBT) s
Residents House Wages Intra house Distribute Transfer to Transfe Househ

Institutions hold & transfers d profits households r from old
(4) Salaries ROW income
s
Firms Earn b. Transfe Firm

Taxes r from income
(EBT) ROW s
Public Taxes Taxes on Taxes on Taxes Transfer Budget Transfe PS

Sector on activities social within P.S deficit r from Income
goods securities ROW s
&
services
Saviings Decreases of Depreciatio Savings of Savings of Budget Deficit Financi
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Investment stocks n of capital household firms surplus balance al
(5) of Resourc
paymen es
ts
(Row) Rest Imports Remun Transfer to Transfer Transfer to Surplus Outlays

of the World eration ROW to ROW ROW balance of to
(6) of extra payments ROW
labour
TOTAL Supply of goods Domestic Paymen Paymen Household Use of Public Total Paymen
& services production t for t for expenditure EBT Expenditur Investmen ts of
labour capital s es ts ROW
services
For the purpose of understanding the interpretation of the SAM table, we will analyse the
flows of receipts (reading per account row) and payments (reading per account column)
of each account compared to the next. Only the first two rows and columns will be
explained because the same applies to the remaining rows and columns.
3.2.1 READING THE ROWS
Goods and services accounts (row 1)
The rows for goods and services accounts, record payments made at market prices, which
include indirect taxes (VAT etc.) due to intermediate consumption of production
activities, end consumption by households, the government and investment, represented
by changes in stock, and gross fixed capital formation and exports.
Activity accounts (row 2)
If we read production activity accounts, by row, we can see that activities receive
payments for: goods and services produced (output from domestic production activities),
74
net of tax and product subsidies; export subsidies and exported goods and services.
These elements make up the total production value.
3.2.2 READING THE COLUMNS
By reading the matrix column by column, the payments made by each account to other
accounts can be identified. Only the first two columns are analysed
Goods and services accounts payments (column 1)
Goods and services pay the value of goods and services produced by activities (domestic
production) into the activities accounts and pay the value of imported products to the rest
of the world account. This account also records payments due to net stock reductions of
goods held in stock (negative changes in stock over the period being analysed). The
prices used for evaluating goods and services are market prices, which include indirect
taxes but exclude consumption subsidies.
Activities accounts payments (column 2)
This column represents the account for domestic production activities. Activities pay:
intermediate consumption to the goods and services accounts, labour and capital services
to the factors accounts, indirect taxes (VAT) to public administration and physical
capital consumption (depreciation) to the capital account;
3.2.3 THE DIFFERENT BLOCKS IN SAM
The different blocks of the SAM are made up of intermediate consumption, added value,
production, end consumption, salaries and profits paid out to institutions, imports and
exports, transfers, gross fixed capital formation and taxes.
a) The intermediate consumption block
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All purchases made by the activities of intermediate consumption goods and services for
use in their production process. In the SAM, they are translated into monetary flows of
the production activities accounts to the various goods and services accounts.
b) Value Added
The value added block refers to payment of factors of production. This payment
comprises salaries and capital payment (machines, buildings and other equipment). In
general, the value added for each production activity is calculated by taking the
difference between the value of total production shown in the total row and the value of
intermediate consumption used. The value added is shown in the SAM by monetary
flows from production activity accounts in columns to the labour and capital accounts in
rows.
c) Domestic sales
This block deals with payments made from the goods and services accounts to production
activities accounts. These domestic sales refer to the share of goods and services
intended for the domestic market; exports of goods and services are therefore not
included.
d) End consumption
This block covers household and State expenditure on food, non-food products and
services for end consumption. In the SAM, end consumption is shown by monetary flows
from household and State accounts to accounts of consumed goods and services.
e) Imports and exports
This refers to all agricultural and non-agricultural products traded abroad. In the SAM,
imports are represented by payments made by imported goods and services accounts to
the rest of the world account. Exports are represented by monetary flows from the rest of
the world account to the exported goods and services accounts.
f) Salaries and profits
76
This refers to all monetary flows from factors of production accounts to household
accounts. They are made up salaries received in exchange for work and as revenue from
capital.
g) Transfers
They represent monetary flows which exist between the various institution accounts.
These are payments between household accounts, payments from corporate accounts to
household accounts, payments from the State account to household accounts and
corporate accounts, payments from the Rest of the World account (emigrates) to
household account and payments from household accounts to the rest of the world
account.
h) Gross capital formation
This refers to all payments made by the savings and investments account to the goods and
services account. It is made up of changes in stock and of GFCF.
i) Taxes
These are payments without anything in form of exchange which household, corporate
and goods and services accounts make to the State account. They are made up of general
income tax, of production taxes (VAT), income and earnings taxes (corporate tax and
income tax), local taxes (patents, urban taxes and council tax), registration fees and stamp
duty and other payments without anything directly being exchanged.
Let us look at Figure 3.1 below which shows a SAM of a simple 2-sector economy
(agriculture and industry) and two institutions (households and government).
The values are expressed in monetary units (mu).
Figure 3.1: A simple SAM (matrix S)

Agriculture Industry Households Government Total
Agriculture 50 20 25 15 110
Industry 30 30 15 5 80
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Households 20 10 0 15 45
Government 10 20 5 2 37
Total 110 80 45 37 272
If we look at matrix S, column by column, it can be seen that to produce 110 mu of

output, the agricultural sector must pay 50 mu to the agricultural sector and 30 mu to the
industrial sector for intermediate consumption. It must also pay 20 mu in salaries to
households and 10 mu in taxes to the government (see "Agriculture" column).
Similarly, the industrial sector, in order to produce 80 mu of output, must pay 20 mu to
the agricultural sector and 30 mu to the industrial sector for intermediate consumption.
Furthermore, it must pay 10 mu in salaries to households and 20 mu in taxes to the
government. (see "Industry" column).
The third column shows household expenditure. Households spend 25 mu in final
consumption of agricultural products, 15 mu of industrial products and pay 5 mu in taxes.
The fourth column shows government expenditure: 15 mu are allocated to the agricultural
sector and 5 mu to the industrial sector through subsidies for production. Additionally, 15
mu are transferred to households (for example, in the form of transfers as income support
for poor households). Finally, 2 mu are made as an internal transfer to the public
administration.
In mathematical terms, this is defined as follows:
a) SAM elements. Each element in matrix S is indicated S ij , where i = 1,2,.....n ; is
the
row index, j = 1,2,.....n is the column index. For example, for SAM in figure 2, where
i = 1,2,3,4 and j = 1,2,3,4 , s22= 30 , s13= 25.
b) Column sums s.j = ∑ sij are the column totals. In our example, S. 1 = 110, S.3 = 45.
(c) Row sums Si. = ∑ sij are the row totals,
In our example, S2. = 80, S3 = 45.
78
As already mentioned, for a given K account, expenditure is equal to receipts and is
shown by the fact that the sum of row is equal to sum of column as shown in the formula
below.
∑Sih = ∑Shj
i. e S.h = Sh
If you divide each element in matrix S, Sij by the total of the corresponding column
S.j, you will get the column ratios or coefficients Cij = Sij
S.j
Therefore, you will have the following matric C:
C11 = S11 C12= S12 . . . . . . . C1n =

S1n
S.1 S.2 S.n
C2 = S21 C22= S22 . . . . . . .

C2n = S2n
S.1 S.2
S.n
... ... ...
Cn1 = Sn1 Cn2= Sn2 . . . . . . . Cnn =
Snn
S.1 S.2 S.n
1 = S.1 1= S.2 . . . . . . . . 1 = S.n

S.1 S.2 S.n
Therefore, the column coefficients matrix (matrix c) will be:
79
Figure 3.2
Agriculture Industry Household Government
Agriculture 0.455 0.250 0.556 0.405
Industry 0.273 0.375 0.333 0.135
Household 0.182 0.125 0.000 0.405
Government 0.091 0.250 0.111 0.054
Total 1.000 1.000 1.000 1.000
Self Assessment Exercise;

Elucidate more on the history and origin of social accounting matrix.
3.3 USES OF SOCIAL ACCOUNTING MATRIX FOR MACROECONOMIC

PLANNING:
The SAM is an approach for data organisation, reconciliation, and descriptive analysis of
the structure of the economy. ―The most important feature of a social accounting matrix
is that it provides a consistent and convenient approach to organising economic data for a
country and it can provide a basis for descriptive analysis and economic modelling in
order to answer various economic policy questions‖ Pleskovic & Trevino, (1985). A
SAM can be used for Macroeconomic planning in two ways: first, a SAM can provide a
framework for the organisation of information related to economic and social structures
of a country‘s economy.
Second, a SAM can serve as a database for a model of the economy under consideration.
A SAM provides comprehensive one-period information on variables, such as the
structure, composition and the level of production, the distribution of income among
households, and the factorial value-added. Similarly it can provide statistical information
on consumption and production pattern of the economy, imports, exports, investment and
so on. Moreover, it may have more detailed information, depending on the data
availability and particular interest, on income distribution, tax structure and monetary
80
variables. Therefore, SAMs can be used to improve the capabilities of countries to obtain
descriptive analysis of the economy, indicating its income distribution picture,
institutional and industrial structure. In a SAM, the information which takes place in
public sector statistics is represented as a component of whole economy. A
SAM can thus provide a comparison opportunity the public sector with either the private
sector or the economy as a whole.
A SAM can also be used as a database for macroeconomic policy modelling in
developing countries. Its framework may contribute to arrangement of different sources
of data in a consistent manner. Different sources of data, such as national accounts,
taxation data, household surveys, input-output tables, can be arranged into an economy-
wide data framework. In most LDCs economic planning suffers from a number of
problems such as insufficient, unreliable and poor quality of data.

Discuss at least six uses of Social accounting matrix to a nation‘s economic planning.
4.0 CONCLUSION
From our discussion so far on Social accounting matrix technique of Economic Planning
, we can deduce the following facts:
That SAM can be seen as a means of presenting in a single matrix the interaction between
production, income, consumption and capital accumulation and that SAM can provide a
framework for the organisation of information related to economic and social structures
of a country‘s economy and can as well serve as a database for a model of the economy
under consideration.
5.0 SUMMARY
In this unit, we have attempted to show what Social accounting matrix , its origin and
structures, as well as the uses of the technique for economic planning is all about from
81
various scholars of repute. Also, from the point of view of harmonization, you have learnt
that SAM can provide a framework for the organisation of information related to
economic and social structures of a country‘s economy and can as well serve as a
database for a model of the economy under consideration. I believe your understanding of
this unit has given you a basis to understand the next unit. I expect you by now to be
anxious of reading more about computable general equilibrium model which will be duly
served in the next unit.

Meaning and uses of Social accounting matrix technique in economic development
planning.
82
Arndt, C., Cruz, A, Jensen, H.T., Robinson, S., Tarp, F., (1997), "Social Accounting
Matrices for Mozambique 1994 and 1995", TMD Discussion Paper 28, Washington
D.C.: International Food Policy Research Institute
Bank of International Settlements, (1995), (on-line 15 Jan 2008) The Payment System
in Mozambique, published by Committee on payment systems.
Chowdhury, A & Kirkpatrick, C.(1994), ‗Development Policy and Planning: An

Introduction
to Models and Techniques‘, London and New York:Routledge
Fox, K.A., J.K. Sengupta & E. Thorbecke, 1996. The Theory of Quantitative
Economic
Policy, North Holland, Amsterdam
Hayden, C. & Round, J. I.(1982), ‗Developments in Social Accounting Methods as

Applied to the Analysis of Income Distribution and Employment Issues‘, World
Development, Vol: 10, No: 6.
King, B. B.(1988), ‗What is SAM?‘ in Pyatt, G. and Round, J. I. (ed.), Social

Accounting Matrix:A Basis for Planning, Washington D.C: The World Bank.
Mansur, A. & Whalley, J, 1984, ―Numerical specification of applied general

equilibrium models: Estimation, calibration, and data‖, in Scarf, H.E., and Shoven,
J.B. (Eds.), 1984, Applied General Equilibrium analysis, Cambridge, UK: Cambridge
University.
83
Mitra-Kahn, Benjamin H., (2008), "Debunking the Myths of Computable General
Equilibrium Models", SCEPA Working Paper 01-2008
Pleskovic, B. & Trevino, G.(1985), ‗The Use of A Social Accounting Matrix

Framework for Public Sector Analysis: The Case Study of Mexico‘ ICPE Monograph
Series, No:17.
Pyatt, G. and Thorbecke, E., (1976), Planning Techniques for a Better Future,
International Labour
Pyatt and Round, (1985), "Social Accounting Matrices: A Basis for Planning", The
World Bank
Robinson, S. (1989). ―Chapter 18: Multisectoral models‖, in Handbook of

Development Economics, Volume II,
Robinson, S., Cattaneo, A., and El-Said, M., (2001), ―Updating and Estimating a
Social Accounting Matrix Using Cross Entropy Methods‖, Economic Systems
Research 13 (1), pp. 47–64
Stone, R. and Brown, A., (1962), A computable model for economic growth,
Cambridge, UK: Cambridge Growth Project.
Taylor, L.(1983), ‗Structuralist Macroeconomics:Applicable Models for the Third

World countries.
84
UNIT II
GENERAL EQUILIBRIUM MODEL OF ECONOMIC PLANNING

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Overview and modern concept of General equilibrium theory in economics.
3.2 Properties and characterization of general equilibrium analysis.
3.3 Unresolved problems in general equilibrium analysis.

4.0 Conclusion
5.0 Summary
I.0 Introduction:
Having studied critically the concept of social accounting matrix and its usefulness in the
economic planning of developing nations, it is imperative to familiarise you with the
topic to be discussed in this unit. There is no country, whether developed or Less
developed that has not in one way or the other made use of models that is useful for their
economic plan. Another model that we will be concerned with in this unit is the general
equilibrium models. Therefore , our discussion in this unit will describe the overview
and modern concept of General equilibrium theory in economics, ascertain the Properties
and characterization of general equilibrium analysis and discuss the unresolved problems
in general equilibrium analysis to check how they are used in macroeconomic analysis of
Less Developed Countries of which Nigeria is one.
85
2.0 OBJECTIVES
 Understand the overview and modern concept of General equilibrium theory in

economics
 Ascertain the Properties and characterization of general equilibrium analysis
 Discuss the unresolved problems in general equilibrium analysis
3.0 MAIN CONTENTS

3.1 Overview and modern concept of General equilibrium theory in economic
problem
In economics, general equilibrium theory attempts to explain the behavior of supply,

demand, and prices in a whole economy with several or many interacting markets, by
seeking to prove that a set of prices exists that will result in an overall (or "general")
equilibrium. General equilibrium theory contrasts to partial equilibrium, which only
analyzes single markets. As with all models, this is an abstraction from a real economy; it
is proposed as being a useful model, both by considering equilibrium prices as long-term
prices and by considering actual prices as deviations from equilibrium.
General equilibrium theory both studies economies using the model of equilibrium
pricing and seeks to determine in which circumstances the assumptions of general
equilibrium will hold. The theory dates to the 1870s, particularly the work of French
economist Léon Walras in his pioneering 1874 work Elements of Pure Economics.
It is often assumed that agents are price takers, and under that assumption two common
notions of equilibrium exist: Walrasian (or competitive) equilibrium, and its
generalization; a price equilibrium with transfers.
86
Broadly speaking, general equilibrium tries to give an understanding of the whole
economy using a "bottom-up" approach, starting with individual markets and agents.
Macroeconomics, as developed by the Keynesian economists, focused on a "top-down"
approach, where the analysis starts with larger aggregates, the "big picture". Therefore,
general equilibrium theory has traditionally been classified as part of microeconomics.
The difference is not as clear as it used to be, since much of modern macroeconomics has
emphasized microeconomic foundations, and has constructed general equilibrium models
of macroeconomic fluctuations. General equilibrium macroeconomic models usually
have a simplified structure that only incorporates a few markets, like a "goods market"
and a "financial market". In contrast, general equilibrium models in the microeconomic
tradition typically involve a multitude of different goods markets. They are usually
complex and require computers to help with numerical solutions.
In a market system the prices and production of all goods, including the price of
money and interest, are interrelated. For example, a change in the price of one good, say
bread, may affect another price, such as bakers' wages. If bakers differ in tastes from
others, the demand for bread might be affected by a change in bakers' wages, with a
consequent effect on the price of bread e.g sweet sensation bread and mr biggs bread.
Calculating the equilibrium price of just one good, in theory, requires an analysis that
accounts for all of the millions of different goods that are available.
The first attempt in neoclassical economics to model prices for a whole economy was
made by Léon Walras. Walras' Elements of Pure Economics provides a succession of
models, each taking into account more aspects of a real economy (two commodities,
many commodities, production, growth, money).
In particular, Walras's model was a long-run model in which prices of capital goods are
the same whether they appear as inputs or outputs and in which the same rate of profits is
earned in all lines of industry. This is inconsistent with the quantities of capital goods
being taken as data. But when Walras introduced capital goods in his later models, he
took their quantities as given, in arbitrary ratios. (In contrast, Kenneth Arrow and Gérard
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Debreu continued to take the initial quantities of capital goods as given, but adopted a
short run model in which the prices of capital goods vary with time and the own rate of
interest varies across capital goods.)
Walras was the first to lay down a research program much followed by 20th-century
economists. In particular, the Walrasian agenda included the investigation of when
equilibria are unique and stable. Walras' shows neither uniqueness, nor stability, nor even
existence of an equilibrium is guaranteed and also proposed a dynamic process by which
general equilibrium might be reached, like that of the tâtonnement or groping process.
The tâtonnement process is a model for investigating stability of equilibria. Prices are
announced (perhaps by an "auctioneer"), and agents state how much of each good they
would like to offer (supply) or purchase (demand). No transactions and no production
take place at disequilibrium prices. Instead, prices are lowered for goods with positive
prices and excess supply. Prices are raised for goods with excess demand. The question
for the mathematician is under what conditions such a process will terminate in
equilibrium where demand equates to supply for goods with positive prices and demand
does not exceed supply for goods with a price of zero. Walras was not able to provide a
definitive answer to this question .
3.1.1 Current concept of general equilibrium theory in economics
The modern conception of general equilibrium is provided by a model developed jointly

by Kenneth Arrow, Gérard Debreu, and Lionel W. McKenzie in the 1950s. Debreu
presents this model in Theory of Value (1959) as an axiomatic model, following the style
of mathematics promoted by Nicolas Bourbaki. In such an approach, the interpretation of
the terms in the theory (e.g., goods, prices) are not fixed by the axioms.
Three important interpretations of the terms of the theory have been often cited. First,
suppose commodities are distinguished by the location where they are delivered. Then
the Arrow-Debreu model is a spatial model of, for example, international trade.
88
Second, suppose commodities are distinguished by when they are delivered. That is,
suppose all markets equilibrate at some initial instant of time. Agents in the model
purchase and sell contracts, where a contract specifies, for example, a good to be
delivered and the date at which it is to be delivered. The Arrow–Debreu model of inter
temporal equilibrium contains forward markets for all goods at all dates. No markets exist
at any future dates.
Third, suppose contracts specify states of nature which affect whether a commodity is to
be delivered: "A contract for the transfer of a commodity now specifies, in addition to its
physical properties, its location and its date, an event on the occurrence of which the
transfer is conditional. This new definition of a commodity allows one to obtain a theory
of [risk] free from any probability concept.
Some of the recent work in general equilibrium has in fact explored the implications
of incomplete markets, which is to say an inter temporal economy with uncertainty,
where there do not exist sufficiently detailed contracts that would allow agents to fully
allocate their consumption and resources through time. While it has been shown that such
economies will generally still have an equilibrium, the outcome may no longer be Pareto
optimal. The basic intuition for this result is that if consumers lack adequate means to
transfer their wealth from one time period to another and the future is risky, there is
nothing to necessarily tie any price ratio down to the relevant marginal rate of
substitution, which is the standard requirement for Pareto optimality. Under some
conditions the economy may still be constrained Pareto optimal, meaning that a central
authority limited to the same type and number of contracts as the individual agents may
not be able to improve upon the outcome, what is needed is the introduction of a full set
of possible contracts. Hence, one implication of the theory of incomplete markets is that
inefficiency may be a result of underdeveloped financial institutions or credit constraints
faced by some members of the public. Research still continues in this area.
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SELF ASSESSMENT EXERCISE
Discuss the contributions of economics scholars to the application of General equilibrium

model to economic problems
3.2 Properties and characterization of general equilibrium model
Basic questions in general equilibrium analysis are concerned with the conditions under
which equilibrium will be efficient, which efficient equilibria can be achieved, when
equilibrium is guaranteed to exist and when the equilibrium will be unique and stable.
For us to know this, we shall look at the following
a) First Fundamental Theorem of Welfare Economics
The First Fundamental Welfare Theorem asserts that market equilibria are Pareto
efficient. In a pure exchange economy, a sufficient condition for the first welfare theorem
to hold is that preferences be locally non satiated. The first welfare theorem also holds for
economies with production regardless of the properties of the production function.
Implicitly, the theorem assumes complete markets and perfect information. In an
economy with externalities, like Nigeria for example, it is possible for equilibria to arise
that are not efficient.
This theorem is informative in the sense that it points to the sources of inefficiency in
markets. Under the assumptions above, any market equilibrium is tautologically efficient.
Therefore, when equilibria arise that are not efficient, the market system itself is not to
blame, but rather some sort of market failure.
b) Second Fundamental Theorem of Welfare Economics
While every equilibrium is efficient, it is clearly not true that every efficient allocation of
resources will be an equilibrium. However, the second theorem states that every efficient
allocation can be supported by some set of prices. In other words, all that is required to
reach a particular outcome is a redistribution of initial endowments of the agents after
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which the market can be left alone to do its work. This suggests that the issues of
efficiency and equity can be separated and need not involve a trade-off. The conditions
for the second theorem are stronger than those for the first, as consumers' preferences
now need to be convex (convexity roughly corresponds to the idea of diminishing rates of
marginal substitution, or to preferences where "averages are better than extrema").
Further up, the Second Fundamental Theorem of Equilibrium Analysis leads to Perfect
Equilibrium Analysis where market forces join together planned economies in a perfect
bound.
c) Existence
Even though every equilibrium is efficient, neither of the above two theorems say
anything about the equilibrium existing in the first place. To guarantee that an
equilibrium exists, it suffices that consumer preferences be convex (although with enough
consumers this assumption can be relaxed both for existence and the second welfare
theorem). Similarly, but less plausibly, convex feasible production sets suffice for
existence; convexity excludes economies of scale.
Proofs of the existence of equilibrium traditionally rely on fixed-point theorems such

as Brouwer fixed-point theorem for functions (or, more generally, the Kakutani fixed-
point theorem for set-valued functions). Another method of proof of existence, global
analysis, uses Sard's lemma and the Baire category theorem; this method was pioneered
by Gérard Debreu and Stephen Smale.
d) Uniqueness
Although generally (assuming convexity) an equilibrium will exist and will be efficient,
the conditions under which it will be unique are much stronger. While the issues are
fairly technical the basic intuition is that the presence of wealth effects (which is the
feature that most clearly delineates general equilibrium analysis from partial equilibrium)
generates the possibility of multiple equilibria. When a price of a particular good changes
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there are two effects. First, the relative attractiveness of various commodities changes;
and second, the wealth distribution of individual agents is altered. These two effects can
offset or reinforce each other in ways that make it possible for more than one set of prices
to constitute an equilibrium.
There has been much research on conditions when the equilibrium will be unique, or
which at least will limit the number of equilibria. One result states that under mild
assumptions the number of equilibria will be finite and odd . Furthermore if an economy
as a whole, as characterized by an aggregate excess demand function, has the revealed
preference property (which is a much stronger condition than revealed preferences for a
single individual) or the gross substitute property then likewise the equilibrium will be
unique.
e) Determinacy
Given that equilibria may not be unique, it is of some interest to ask whether any
particular equilibrium is at least locally unique. If so, then comparative statics can be
applied as long as the shocks to the system are not too large. As stated above, in a regular
economy equilibria will be finite, hence locally unique. One reassuring result, due to
Debreu, is that "most" economies are regular.
Work by Michael Mandler (1999) has challenged this claim. The Arrow–Debreu–
McKenzie model is neutral between models of production functions as continuously
differentiable and as formed from (linear combinations of) fixed coefficient processes.
Mandler accepts that, under either model of production, the initial endowments will not
be consistent with a continuum of equilibria, except for a set of Lebesgue measure zero.
However, endowments change with time in the model and this evolution of endowments
is determined by the decisions of agents (e.g., firms) in the model. Agents in the model
have an interest in equilibria being indeterminate:
"Indeterminacy, moreover, is not just a technical nuisance; it undermines the price-taking

assumption of competitive models. Since arbitrary small manipulations of factor supplies
92
can dramatically increase a factor's price, factor owners will not take prices to be
parametric.
f) Stability
In a typical general equilibrium model the prices that prevail "when the dust settles" are
simply those that coordinate the demands of various consumers for various goods. But
this raises the question of how these prices and allocations have been arrived at, and
whether any (temporary) shock to the economy will cause it to converge back to the same
outcome that prevailed before the shock. This is the question of stability of the
equilibrium, and it can be readily seen that it is related to the question of uniqueness. If
there are multiple equilibria, then some of them will be unstable. Then, if an equilibrium
is unstable and there is a shock, the economy will wind up at a different set of allocations
and prices once the convergence process terminates. However stability depends not only
on the number of equilibria but also on the type of the process that guides price changes
(for a specific type of price adjustment process see Walrasian auction). Consequently
some researchers have focused on plausible adjustment processes that guarantee system
stability, i.e., guarantee convergence of prices and allocations to some equilibrium. When
more than one stable equilibrium exists, where one ends up will depend on where one
begins.
Analyse the basic questions in general equilibrium theory characterization.
3.3 Unresolved problems in general equilibrium model
Research building on the Arrow–Debreu–McKenzie model has revealed some problems

with the model. The Sonnenschein–Mantel–Debreu results show that, essentially, any
restrictions on the shape of excess demand functions are stringent. Some think this
93
implies that the Arrow–Debreu model lacks empirical content. At any rate, Arrow–
Debreu–McKenzie equilibria cannot be expected to be unique, or stable.
A model organized around the tâtonnement process has been said to be a model of a
centrally planned economy and not a decentralized market economy. Some research has
tried to develop general equilibrium models with other processes. In particular, some
economists have developed models in which agents can trade at out-of-equilibrium prices
and such trades can affect the equilibria to which the economy tends. Particularly
noteworthy are the Hahn process, the Edgeworth process and the Fisher process.
The data determining Arrow-Debreu equilibria include initial endowments of capital

goods. If production and trade occur out of equilibrium, these endowments will be
changed and further complicating the picture.
In a real economy, however, trading, as well as production and consumption, goes on out
of equilibrium. It follows that, in the course of convergence to equilibrium (assuming that
occurs), endowments change. In turn this changes the set of equilibria. Put more
succinctly, the set of equilibria is path dependent... [This path dependence] makes the
calculation of equilibria corresponding to the initial state of the system essentially
irrelevant. What matters is the equilibrium that the economy will reach from given initial
endowments, not the equilibrium that it would have been in, given initial endowments,
had prices happened to be just.
The Arrow–Debreu model in which all trade occurs in futures contracts at time zero
requires a very large number of markets to exist. It is equivalent under complete markets
to a sequential equilibrium concept in which spot markets for goods and assets open at
each date-state event (they are not equivalent under incomplete markets); market
clearing then requires that the entire sequence of prices clears all markets at all times. A
generalization of the sequential market arrangement is the temporary
equilibrium structure, where market clearing at a point in time is conditional on
expectations of future prices which need not be market clearing ones.
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Although the Arrow–Debreu–McKenzie model is set out in terms of some
arbitrary numerals, the model does not encompass money. Frank Hahn, for example, has
investigated whether general equilibrium models can be developed in which money
enters in some essential way. One of the essential questions he introduces, often referred
to as the Hahn's problem is : "Can one construct an equilibrium where money has value?"
The goal is to find models in which existence of money can alter the equilibrium
solutions, perhaps because the initial position of agents depends on monetary prices.
Some critics of general equilibrium modeling contend that much research in these models
constitutes exercises in pure mathematics with no connection to actual economies. "There
are endeavors that now pass for the most desirable kind of economic contributions
although they are just plain mathematical exercises, not only without any economic
substance but also without any mathematical value as put by Georgescu-Roegen in one of
his paper that assumes more traders in existence than there are points in the set of real
numbers.
Although modern models in general equilibrium theory demonstrate that under certain
circumstances prices will indeed converge to equilibria, critics hold that the assumptions
necessary for these results are extremely strong. As well as stringent restrictions on
excess demand functions, the necessary assumptions include perfect rationality of
individuals;complete information about all prices both now and in the future; and the
conditions necessary for perfect competition. However some results from experimental
economics suggest that even in circumstances where there are few, imperfectly informed
agents, the resulting prices and allocations may wind up resembling those of a perfectly
competitive market (although certainly not a stable general equilibrium in all markets).
Frank Hahn defends general equilibrium modeling on the grounds that it provides a
negative function. General equilibrium models show what the economy would have to be
like for an unregulated economy to be Pareto efficient.
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3.3.1 CRITICS OF GENERAL EQUILIBRIUM THEORY
General equilibrium theory is a central point of contention and influence between the
neoclassical school and other schools of economic thought, and different schools have
varied views on general equilibrium theory. Some, such as the Keynesian and Post-
Keynesian schools, strongly reject general equilibrium theory as "misleading" and
"useless"; others, such as the Austrian school, show more influence and acceptance of
general equilibrium thinking, though the extent is debated. Other schools, such as new
classical macroeconomics, developed from general equilibrium theory.In this context,
while some criticize positively, some do not.
a) Keynesian and Post-Keynesian
Keynesian and Post-Keynesian economists, and their underconsumptionist predecessors

criticize general equilibrium theory specifically, and as part of criticisms of neoclassical
economics generally. Specifically, they argue that general equilibrium theory is neither
accurate nor useful, that economies are not in equilibrium, that equilibrium may be slow
and painful to achieve, and that modeling by equilibrium is "misleading", and that the
resulting theory is not a useful guide, particularly for understanding of economic crises.
They said let us beware of this dangerous theory of equilibrium which is supposed to be
automatically established. A certain kind of equilibrium, it is true, is reestablished in the
long run, but it is after a frightful amount of suffering.
More methodologically, it is argued that general equilibrium is a

fundamentally static analysis, rather than a dynamic analysis, and thus is misleading and
inapplicable. The theory of dynamic stochastic general equilibrium seeks to address this
criticism.
b) Austrian economists
Whether Austrian economists supports or rejects general equilibrium theory and the
precise relationship is unclear. Different Austrian economists have advocated differing
positions, which have changed as Austrian economics developed over time. Some new
96
classical economists argue that the work of Friedrich Hayek in the 1920s and 1930s was
in the general equilibrium tradition and was a precursor to business cycle equilibrium
theory. Others argue that while there are clear influences of general equilibrium on
Hayek's thought, and that he used it in his early work, he came to substantially reject it in
his later work, post 1937. It is also argued by some that Friedrich von Wieser, along with
Hayek, worked in the general equilibrium tradition, while others reject this, finding
influences of general equilibrium on the Austrian economists superficial.
C) New classical macroeconomics
While general equilibrium theory and neoclassical economics generally were originally
microeconomic theories, New classical macroeconomics builds a macroeconomic theory
on these bases. In new classical models, the macroeconomy is assumed to be at its unique
equilibrium, with full employment and potential output, and that this equilibrium is
assumed to always have been achieved via price and wage adjustment (market clearing).
The best-known of such model is Real Business Cycle Theory, in which business
cycles are considered to be largely due to changes in the real economy, unemployment is
not due to the failure of the market to achieve potential output, but due to equilibrium
potential output having fallen and equilibrium unemployment having risen.
d) Socialist economics
Within socialist economics, a sustained critique of general equilibrium theory and

neoclassical economics generally is given in Anti-Equilibrium, based on the experiences
of János Kornai with the failures of Communist central planning.
In your own words summarise the criticism of modern economist to the theory of general
equilibrium applications
4.0 CONCLUSION
From our discussion so far on General equilibrium model , we can deduce the following
facts:
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General equilibrium theory attempts to explain the behavior of supply, demand, and
prices in a whole economy with several or many interacting markets, by seeking to prove
that a set of prices exists that will result in an overall (or "general") equilibrium.
General equilibrium theory both studies economies using the model of equilibrium
pricing and seeks to determine in which circumstances the assumptions of general
equilibrium will hold.
5.0 SUMMARY
In this unit, we have attempted to show what general equilibrium models is all about, its
properties , features and critics from various scholars of repute. Also, from the point of
view of our discussion, you have learnt that General equilibrium theory both studies
economies using the model of equilibrium pricing and seeks to determine in which
circumstances the assumptions of general equilibrium will hold. I believe your
understanding of this unit has given you a basis to understand the next unit. I expect you
by now to be anxious of reading more about computable general equilibrium model
which will be duly served in the next unit.

Submit a one page essay (A4, 1.5 spacing, 12pts, Times New Roman Font) on what
general equilibrium analysis is and can be used for in modern economic problem solving.
.
98
Arrow, K. J.; Hahn, F. H. (1971). General Competitive Analysis. San Francisco: Holden-
Day. ISBN 0-8162-0275-3.
Black, Fischer (1995). Exploring General Equilibrium. Cambridge, MA: MIT

Press. ISBN 0-262-02382-2.
Eaton, B. Curtis; Eaton, Diane F.; Allen, Douglas W. (2009). "Competitive General
Equilibrium". Microeconomics: Theory with Applications (Seventh ed.). Toronto:
Pearson Prentice Hall. ISBN 978-0-13-206424-8.
Geanakoplos, John (1987). "Arrow-Debreu model of general equilibrium". The New

Palgrave: A Dictionary of Economics 1. pp. 116–124.
Grandmont, J. M. (1977). "Temporary General Equilibrium

Theory". Econometrica 45 (3): 535–572. JSTOR 1911674.
Kubler, Felix (2008). "Computation of general equilibria (new developments)". The New
Palgrave Dictionary of Economics (Second ed.).
Mas-Colell, A.; Whinston, M.; Green, J. (1995). Microeconomic Theory. New York:
Oxford University Press. ISBN 0-19-507340-1.
McKenzie, Lionel W. (1981). "The Classical Theorem on Existence of Competitive

Equilibrium". Econometrica 49 (4): 819–841. JSTOR 1912505.
Scarf, Herbert E. (2008). "Computation of general equilibria". The New Palgrave

Dictionary of Economics (Second ed.).
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UNIT III
Computable General Equilibrium Model of economic planning
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Overview, structure and developments in CGE modelling.
3.2 CGE models as multisectoral model and its main features
3.3 Advantages and limitations of GCE
3.4 Uses , Types and Solutions of CGE
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
It is good that we have familiarized ourselves with what General equilibrium theory is all
about in the preceding unit which provides a basic foundational platform that we shall be
looking at in this unit. In this unit, we shall be looking at Computable General
Equilibrium Model of economic planning. An in-depth explanation of the above topics
shall be provided. It is advisable that you critically concentrate as we move along with
explanations that will be given.
2.0 OBJECTIVES
 Show the Overview, structure and developments in CGE modelling.
 Understand CGE models as multisectoral model and its main features
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 Identify the Advantages and limitations of GCE
 Identify the Uses , Types and Solutions of CGE
3.0 MAIN CONTENTS
3.1 OVERVIEW, STRUCTURE AND DEVELOPMENTS IN CGE MODELLING.
Computable general equilibrium (CGE) models are a class of economic models that
use actual economic data to estimate how an economy might react to changes in policy,
technology or other external factors. CGE models are also referred to as AGE which is
applied general equilibrium models.
Computable general equilibrium ( CGE) models also known as applied general

equilibrium (AGE) models are built on the timeless economics foundations of Adam
Smith‘s invisible hand, Walras law, Edgeworth‘s contract curve, Arrow- Debreu proof of
existence and Leontief‘s input-output analysis (Manne 1985).
A CGE model consists of (a) equations describing model variables and (b) a database
(usually very detailed) consistent with the model equations. The equations tend to be neo-
classical in spirit, often assuming cost-minimizing behaviour by producers, average-cost
pricing, and household demands based on optimizing behaviour. However, most CGE
models conform only loosely to the theoretical general equilibrium paradigm. For
example, they may allow for:
1. non-market clearing, especially for labour (unemployment) or for commodities

(inventories)
2. imperfect competition (e.g., monopoly pricinxdg)
3. demands not influenced by price (e.g., government demands)
4. a range of taxes
5. externalities, such as pollution
A CGE model database consists of:0000 and the following.
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1. tables of transaction values, showing, for example, the value of coal used by the
iron industry. Usually the database is presented as an input-output table or as
a social accounting matrix. In either case, it covers the whole economy of a
country (or even the whole world), and distinguishes a number of sectors,
commodities, primary factors and perhaps types of household.
2. elasticities: dimensionless parameters that capture behavioural response. For
example, export demand elasticities specify by how much export volumes might
fall if export prices went up. Other elasticities may belong to the Constant
Elasticity of Substitution class. Amongst these are Armington elasticities, which
show whether products of different countries are close substitutes, and elasticities
measuring how easily inputs to production may be substituted for one
another. Expenditure elasticities show how household demands respond to income
changes.
CGE models are descended from the input-output models pioneered by Wassily Leontief,
but assign a more important role to prices. Thus, where Leontief assumed that, say, a
fixed amount of labour was required to produce a ton of iron, a CGE model would
normally allow wage levels to (negatively) affect labour demands.
CGE models derive too from the models for planning the economies of poorer countries
constructed (usually by a foreign expert) from 1960 onwards. Compared to the Leontief
model, development planning models focused more on constraints or shortages—of
skilled labour, capital, or foreign exchange.
CGE modelling of richer economies descends from Leif Johansen's 1960 MSG model of
Norway, and the static model developed by the Cambridge Growth Project in the UK.
Both models were pragmatic in flavour, and traced variables through time. The
Australian MONASH model is a modern representative of this class. Perhaps the first
CGE model similar to those of today was that of Taylor and Black (1974).These models
are as well applicable to economic planning of developing nations.
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Discuss briefly the structure of CGE modeling in economic analysis.
Table 3.2 A SIMPLIFIED STRUCTURE OF CGE MODEL
3.2 CGE MODELS AS MULTISECTORAL MODEL AND ITS MAIN

FEATURES
This section provides a review of different types of multisectoral models and then focuses
in particular on CGE models. CGE model belong to a class of models generally referred
to as multisectoral macro models. As we have earlier discussed in previous modules,
Models that fall into category include the following:
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(a). Input-Output Models
(b). Linear Programming Models.
(c). Macroeconometric Models.
(d). Computable (or applied) General Equilibrium Models.
The essential features of the different types of models, are presented below. It should be
mentioned however that these are broad generalizations for the purpose of identifying the
dominant characteristic of each type of model. For instance, CGE
Model have both static and dynamic components. However, in most cases we have static
CGE models because the dynamic components are not as well developed as what we may
find with macroeconometric models.
TYPOLOGY OF MACRO MODELS.
Classification of models LP IO MM CGE
Where :
LP - Linear programming Models
IO - Input Output Models
MM - Macroeconometric Models
CGE – Computable General Equilibruim Models
The focus of this section is however on CGE models. CGE represents one of the most
prominent types of models used for policy analysis.
Unlike macroeconometric models that emphasize time series data analysis, CGE model
focus on interindustry analysis thereby permitting the analysis of the impacts of policy on
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resource allocation. Another feature is that CGE models in general can be numerically
solved for market clearing prices on all product and factor markets, Moreover, CGE
models are generally focused on the real side of the economy, although financial
instruments and financial markets are gaining increasing attention.
CGE models are highly non-linear and allow for feedback relations from production
levels and prices to final demand. They have neo-classical production and expenditure
functions and incorporate a variety of substitution possibilities in production, demand and
trade. Formalized analyses of general equilibrium systems have provided insights into the
factors determining the allocation of resources and the distribution of incomes in market
economies. With the development of CGE models, the general equilibrium theory has
become an operational tool in empirically oriented economic analysis.
The basic structure of a CGE model can be generalized as follows: It starts with the
specifications of the agents in the economy and their behavior; the rules that bring
different markets to equilibrium and macroeconomic conditions. Most CGE models
identify four categories of agents: households, producers, government and the rest of the
world. Usually, behavioural rules are specified for these actors that reflect their assumed
motivations. For example, producers maximize profits subject to technological
constraints and households maximize utility subject to budget constraints. Third, agents
make their decisions based on signals they observe. In the neoclassical models, these
signals are the prices. Next, a set of market equilibrium conditions and macro constraints
are imposed on the system: the balance of payments, savings-investment balance, the
government budget and factor market equilibrium.
A CGE model is one of the most rigorous, cutting-edge quantitative methods to evaluate
the impact of economic and policy shocks -particularly policy reforms- in the economy as
a whole. Because of its nature, this tool is significantly useful for policy design.
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What are the features of CGE models as a multi-sector model in economic analysis.
3.3 ADVANTAGES AND LIMITATIONS OF CGE
a) ADVANTAGES OR STRENGHT OF CGE
CGE models have a number of strong advantages and expectedly, some drawbacks.
Among the several benefits of the CGE models are the following. They provide
conceptual consistency for model analysis. CGE models are based on established axioms
and principles of microeconomics such as profit and utility maximization, and rational
behaviour of economics agents. For instance, under the Walras law, households are
presumed to be on their budget constraint, there are zero profit conditions for firms; and
demand and supply are equal for all commodities and factors of production. In addition to
conceptual consistency, the social accounting matrix, which provides the data base for
CGE models, ensures accounting consistency: expenditures cannot exceed incomes and
there is also consistent factor allocation making sure that factor markets are cleared.
Another advantages of CGE models is that analysis is based on inter-industry or multi-

sector backward and forward linkages. Hence, they permit analyses of resource
allocation and how policies impact or permeate through the various sectors of the
economy. A major strength of CGE is that it allows for welfare analysis. It provides a
laboratory for evaluating winners and losers from policy changes which may provide an
avenue to apply compensatory schemes for losers from economic reforms, especially if
they belong to the vulnerable groups. In other words, it allows for the analysis of equity
implications of policy measures and changes in real income resulting from changes in
prices.
b) LIMITATIONS OR PROBLEMS OF CGE
CGE models also have some important limitations. Firstly, like other types of models,
CGE models are abstractions from reality, Hence. Their structures are influenced
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significantly by the judgements and predispositions of the modeller. Modellers have
significant flexibility in the choice of model set up, especially, functional forms,
disaggregation, closure rules,etc. Secondly,CGE models are still relatively aggregated
given their focus on macroeconomic, sectoral and social effects. Thirdly, they require
large numbers of parameters and elasticities, which often have to be ‗borrowed‘ or
‗guesstimated.‘Additionally, there are no common statistical tests for the model
specifications. Hence, unlike macroeconometric models, it is difficult to assess the
validity and reliability of the particular specification forms chosen by the modeler.
Fourthly, CGE models are not appropriate for forecasting. Fifth, issues of
uncertainty,financial sector, and true dynamics are sill rudimentary in CGE models.
Finally, it requires considerable technical skill to formulate, solve and interpret the results
of a CGE model.
Highlight the advantages and problems of CGE modelling
3.4 USES , TYPES AND SOLUTIONS OF CGE MODELS
a) USES OF CGE MODELS
CGE models are useful whenever we wish to estimate the effect of changes in one part of
the economy upon the rest. For example, a tax on flour might affect bread prices, the CPI,
and hence perhaps wages and employment. They have been used widely to analyse trade
policy. More recently, CGE has been a popular way to estimate the economic effects of
measures to reduce greenhouse gas emissions.
CGE models always contain more variables than equations—so some variables must be
set outside the model. These variables are termed exogenous; the remainder, determined
by the model, is called endogenous. The choice of which variables are to be exogenous is
called the model closure, and may give rise to controversy. For example, some modellers
107
hold employment and the trade balance fixed; others allow these to vary. Variables
defining technology, consumer tastes, and government instruments (such as tax rates) are
usually exogenous.
Today there are many CGE models of different countries. One of the most well-known
CGE models is global GTAPmodel of world trade.
CGE models are useful to model the economies of countries for which time series data
are scarce or not relevant (perhaps because of disturbances such as regime changes).
Here, strong, reasonable, assumptions embedded in the model must replace historical
evidence. Thus developing economies are often analysed using CGE models, such as
those based on the IFPRI template model.
CGE models are the best choice if the economic or policy shock to be evaluated is
expected to have significant impacts throughout the economy. Moreover, CGE models
are the best option if the research question involves analyzing the static/dynamic, direct/
indirect and short/long term effects caused by a shock. Thus, because of its nature, CGE
analysis performs well when evaluating, among others:
 Fiscal policy
 Trade policy
 Climate Change shocks
 Shocks in international prices etc.
b) Comparative-static and dynamic type of CGE model
Many CGE models are comparative-static: they model the reactions of the economy at
only one point in time. For policy analysis, results from such a model are often
interpreted as showing the reaction of the economy in some future period to one or a few
external shocks or policy changes. That is, the results show the difference (usually
reported in percent change form) between two alternative future states (with and without
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the policy shock). The process of adjustment to the new equilibrium is not explicitly
represented in such a model, although details of the closure (for example, whether capital
stocks are allowed to adjust) lead modellers to distinguish between short-run and long-
run equilibria.
By contrast, dynamic CGE models explicitly trace each variable through time—often at
annual intervals. These models are more realistic, but more challenging to construct and
solve—they require for instance that future changes are predicted for all exogenous
variables, not just those affected by a possible policy change. The dynamic elements may
arise from partial adjustment processes or from stock/flow accumulation relations:
between capital stocks and investment, and between foreign debt and trade deficits.
However there is a potential consistency problem because the variables that change from
one equilibrium solution to the next are not necessarily consistent with each other during
the period of change.
Recursive-dynamic CGE models are those that can be solved sequentially (one period at
a time). They assume that behaviour depends only on current and past states of the
economy. Alternatively, if agents' expectations depend on the future state of the
economy, it becomes necessary to solve for all periods simultaneously, leading to full
multi-period dynamic CGE models. Within the latter group dynamic stochastic general
equilibrium models explicitly incorporate uncertainty about the future.
c) Solution Techniques
Early CGE models were often solved by a program custom-written for that particular
model. Thus, models were expensive to construct, and sometimes appeared as a 'black
box' to outsiders. Today most CGE models are formulated and solved using one of
the GAMS or GEMPACK software systems. AMPL, Excel and MATLAB are also used.
The use of such systems has lowered the cost of entry to CGE modeling, allowed model
simulations to be independently replicated, and increased the transparency of the models.
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Elucidate on the uses of CGE modeling in economic analysis.
4.0 CONCLUSION
From our discussion so far on Computable general equilibrium models of Economic
Planning , we can deduce the following facts:
That Computable general equilibrium (CGE) models are a class of economic models that
use actual economic data to estimate how an economy might react to changes in policy,
technology or other external factors. CGE models are also referred to as AGE which is
applied general equilibrium models.
5.0 SUMMARY
In this unit, we have attempted to show what Computable general equilibrium models is
all about, its structures , advantages, limitations as well as its uses, types and critics from
various schools of thought. Also, from the point of view of our discussion, you have
learnt thata CGE model consists of the equations describing model variables and a
database that is consistent with the model equations. The equations tend to be neo-
classical in spirit, often assuming cost-minimizing behaviour by producers, average-cost
pricing, and household demands based on optimizing behaviour. However, most CGE
models conform only loosely to the theoretical general equilibrium paradigm. I believe
your understanding of this unit has given you a basis to prepare for the next unit. I expect
you by now to be anxious of reading more about linear programming techniques which
will be duly served in the next unit.

various limitations and weaknesses of Computable general equilibrium models that you
are familiar with.
110
Böhringer C., 2004. Sustainability impact assessment : the use of computable general
equilibrium models. Economie internationale 2004/3, n° 99, pp. 9-26
Löfgren, H. (1999). ―Exercises in General Equilibrium Modeling Using GAMS.‖

Microcomputers in Policy Research 4, International Food Policy Research Institute.
Löfgren, H., Harris, R.L. and Robinson, S. (2001). ―A Standard Computable General
Equilibrium (CGE) Model in GAMS.‖ International Food Policy Research Institute:
Trade and Macroeconomics Division Discussion Paper, No.75, May 2001.
Mitra-Kahn, Benjamin H., 2008, "Debunking the Myths of Computable General

Equilibrium Models", SCEPA Working Paper 01-2008
Pyatt, G. and Thorbecke, E., 1976, Planning Techniques for a Better Future,
International Labour Office.
Robinson, S., Cattaneo, A., and El-Said, M., 2001, ―Updating and Estimating a Social
Accounting Matrix Using Cross Entropy Methods‖, Economic Systems Research 13 (1),
pp. 47–64
Stone, R. and Brown, A., 1962, A computable model for economic growth, Cambridge,
UK: Cambridge Growth Project
111
MODULE 4
LINEAR PROGRAMMING TECHNIQUE AND COST-BENEFIT ANALYSIS OF
ECONOMIC PLANNING
Unit 1: Introduction to the concept of Linear Programming technique

Unit 2: Linear Programming technique and its application in Planning
Unit 3: Project selection technique of cost-benefit analysis
UNIT I INTRODUCTION TO THE CONCEPT OF LINEAR PROGRAMMING

TECHNIQUE
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Origin and meaning of linear programming technique
3.2 Conditions and generalisations of linear programming
3.3 Assumptions of linear programming technique
4.0 Conclusion
5.0 Summary
1.0 INTRODUTION
Our discussion in the last module of this course was based on a multisector economic
model known as SAM, GE, and CGE. Similarly, we referred to the necessity of a plan
being consistent and constructive based on the economic nature that is prevalent in such
economy. Therefore our task in this last module would be to look at the process of plan
formulation using other multi sector model or technique. It is therefore intended to
introduce you to the concept of Linear programming technique and benefit-cost analysis
and their relevance in economic planning of nations.
112
2.0OBJECTIVES
• Identify the Origin and meaning of linear programming technique
. • Show the Conditions and generalisations of linear programming
. • Highlight the assumptions of linear programming technique.
3.0 MAIN CONTENTS

3.1 ORIGIN AND MEANING OF LINEAR PROGRAMMING TECHNIQUE
As we have been discussing from the earlier modules and unit, another multi-sector
model is what we shall be looking at which is Linear Programming.
Linear Programming is a mathematical device developed by the mathematician George
Dantzig in 1947 for planning the diversified activities of the US Air Force connected with
the problem of supplies to the forces. Linear or mathematical programming, also known
as activity analysis, has been further developed in its application to the firm, managerial
economics and finally to development planning.
It is a mathematical technique for the analysis of optimum decisions, subject to certain
constraints in the form of linear inequalities. Mathematically speaking, it applies to those
problems which require the solution of maximization or minimization problems subject
to a system of linear inequalities stated in terms of certain variables. The problems of
maximization and minimization are also called optimization problems. When cost and
price per unit change with the size of output, the problem is non – linear and if they do
not change with output, the problem is linear. Linear programming may thus be defined
as a method to decide the optimum combination offactors to produce a given
output or the optimum combination of products to be produced by given plan and
equipment. It is also used to decide between a variety of techniques to produce a
commodity. The technique involved in linear programming is similar to the one adopted
in input – output analysis for the industry.
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Discuss the meaning and origin of linear programming technique.
3.2 CONDITIONS AND GENERALISATIONS OF LINEAR PROGRAMMING

You should know that for any principle to hold in any situation, certain conditions and
generalizations has to be satisfied. The application of linear programming (LP) technique
to any problem rests on certain conditions and generalizations. First, there is a definite
objective. It may be the maximization of profits or national income or employment of the
minimization of costs. It is known as the objective function or the criterion function. If a
quantity is maximized, its negative quantity is minimized. Every maximization problem
has its dual problem, that of minimization. The original problem is the primal problem
which always has its dual. If the primal problem pertains to maximization, the dual
involves minimization and vice versa.
Secondly there should be alternative production processes for achieving the objective.
The concept of process or activity is the most important in linear programming. A
process is a ‗specific‘ method of performing an economic task.‘ It is ‗some physical
operation, e.g consuming something, storing something, selling something, throwing
something away, as well as manufacturing something in a particular manner. The LP
technique enables the planning authority to choose the most efficient and economical
process in attaining the objectives.
Thirdly, there must be certain constraints or restraints of the problem. They are the
limitations or restrictions pertaining to certain conditions of the problems, as to what
cannot be done and what has to be done. They are also known as inequalities. They may
be limitations of resources such as land, labour or capital.
Fourthly, there are the choice variables, the various production processes or activities so
as to maximize or minimize the objective function and to satify all the restraints.
Lastly, there are the feasible and optimal solutions. Given the income of the consumer
and the prices of goods, feasible solutions are all possible combinations of the goods he
can feasibly buy. Feasible solutions of two goods for the consumer are all combinations
114
that lie on and to the left of the budget line. Whereas, on an isocost line, they are the
combinations that lie on and to right of it. We may put it differently that a feasible
solution is one which satisfies all the restraints.The optimal solution is the best of the
feasible solutions. If a feasible solution maximizes or minimizes the objective function, it
is an optimal solution. The best available procedure for finding out the optimal solution
out of the possible feasible solutions is the simplex method. It is a highly mathematical
and technical method involved in linear programming. However, the main aim of linear
programming is to find out optimal solutions and study their characteristics.

Briefly Show the conditions and generalizations involves in Linear Programming
technique.
3.3 ASSUMPTIONS OF LINEAR PROGRAMMING TECHNIQUE

The linear programming analysis is based upon the following assumptions.
i. The decision-making body is faced with certain constraints or resource
restrictions. They may be credit, raw material and space constraints on its
activities. The type of constraints in fact depend upon the nature of problem.
Mostly, they are fixed factors in they production process.
ii. It assumes a limited number of alternative production processes.
iii. It assumes linear relations among the different variables which implies constant
proportionality between inputs and outputs within a process.
iv. Input – output prices and coefficients are given and constant. They are known with
certainty.
v. The assumption of additivity also underlies linear programming techniques which
means that the total resources used by all firms must equal the sum of resources
used by each individual firm.
vi. The LP technique assumes continuity and divisibility in produces and factors.
vii. Institutional factors are also assumed to be constant.
115
Lastly, for programming a certain period is assumed. For conveniences and more
accurate results, the period is generally short, though longer periods are not ruled out.

Highlight the assumptions underlying linear programming technique.
4.0 CONCLUSION
From our discussion so far on the introduction to linear programming as a concept , we
can deduce the following facts:
That Linear or mathematical programming, also known as activity analysis, has been
further developed in its application to the firm, managerial economics and finally to
development planning for the analysis of optimum decisions, subject to certain
constraints in the form of linear inequalities. It also applies to those problems which
require the solution of maximization or minimization problems subject to a system of
linear inequalities stated in terms of certain variables which is also regarded as
Optimisation problems.
5.0 SUMMARY
In this unit, we have attempted to discuss the introductory concept of linear
programming, its origin and meaning, conditions and generalization, and assumptions
underlying the concept. Also, from the point of view of our discussion, you have learnt
that the main aim of linear programming is to find out optimal solutions and study their
characteristics. I believe your understanding of this unit has given you a basis to
understand the next unit. I expect you by now to be anxious of reading more about what
will be duly served in the next unit.
Submit a one page essay (A4, 1.5 spacing, 12pts, Times New Roman Font) .
The concept of linear programming as a model of economic planning of nations cannot
be overemphasized; Discuss.
116
7.0REFERENCES/FURTHER READING

Pumark Nigeria Ltd.
Ibadan.
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UNIT II
LINEAR PROGRAMMING TECHNIQUE AND ITS APPLICATION IN PLANNING
CONTENTS
1.0 Introduction
2.0Objectives
3.0 Main Content
3.1 Production capacity technique of Linear Programming.
3.2 Limitations of linear programming technique.
3.3 Uses of linear programming technique in planning .

4.0 Conclusion
5.0 Summary
I.0 Introduction:
Our discussion in the last unit has introduced to us the linear programming technique and
its properties as it can be used in formulating economic plan. Therefore , our discussion
in this unit will describe the Production capacity technique of Linear Programming,
Show the various limitations of linear programming and the Uses of linear programming
model in planning of Less Developed Countries of which Nigeria is one. It is important
to take closer attention to the explanations given in this unit for easy assimilation.
2.0 OBJECTIVES
- Understand the Production capacity of LP technique .
- Highlight the Limitations of linear programming technique.
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- Mention the uses of linear programming technique in planning
3.0 MAIN CONTENTS

3.1 PRODUCTION CAPACITY TECHNIQUE
In plan formulation, the planners have to decide whether to use labour – intensive or
capital – intensive technique of production, depending on its outlay, They will choose
that technique which maximizes output.
Let us suppose that it is planned to produce a commodity Z. using X and Y inputs, its
objective is to maximize output. It has two alternative production processes, C ( capital –
intensive) and L (labour – intensive). The constraint is a given cost outlay MP as shown
in the figure. All other assumptions given above are applicable. The problem is explained
in terms of Fig. 4.1.
FIG 4.1
Units of input Y per period are measured along the vertical axis and units of input X per
period are shown on the horizontal axis. If process C requires two units of input Y to
every unit of input X, it will produce 50 units of commodity Z. If the inputs of X and Y
are doubled to four units of Y and two units of X output is also doubled to 100 units of Z.
These combinations of X and Y, represented by a and b, establish the output scale along
the capital – intensive process ray OC. On the other hand, the same units (50) of good Z
119
can be produced by process L by combing three units of X with one unit of Y. And 100
units of Z can be produced by doubling the inputs X and Y to six units of X and two units
of Y. These output scales are established along the labour – intensive process ray Ol, as
represented by input combinations c and d. If the points a and c at the 50 units level on
the linear rays OC and OL are joined, they form an isoquant ( shown, dotted) lasc1. At
the 100 units output level,the corresponding isoquant is l1bds. The cost – outlay
constraint is represented by the isocost curve MP and it places a limit on the production
capacity of the project The project can produce with either of the two available
techniques C and L within the area represented by the triangle Obd. It is not possible for
it to produce outside this ‗area of feasible solutions‘ the ‗optimal solution‘ which
maximizes the output will occur at the point where the isocost curve touches the isoquant
with the highest output. In Fig. 4.1 the isocost curve MP touches the isoquant l1bds at
point b on the process ray OC. It shows that the project will use the capital –intensive
technique C by using four units of input Y and two units of input X and produce 100
units of commodity Z.
FIG 4.2
Take another project whose objective function is to maximize its revenue subject to
certain constraints of limited capacities. Suppose it produces two products, X and Y.
It has four departments each with a fixed capacity.Let these departments relate to
manufacturing,
Assembling, polishing, and packing the product which be designated as A,B,C and D.
The Problem is illustrated graphically in Fig. 4.2. TheProduction of X and Y is subject to
120
constraints, A,B, C and D. Constraint A limits the production of XTo OA. Constraints B
limits the production of Y to OB. Constraint C limits the production of both X and Y to
OC1, and OC respectively, while constraints D limits their production to OD1 and OD.
The area OATSRB shows all combinations of X and Y that can be produced without
violating any combination at any point outside this area.
The original solution can be found out by taking an isoprofit line within the feasibility
zone. An isoprofit all combinations of X and Y which yield the same profit to the firm.
The optimal solution lies on the highest isoprofit line EF in the polygon OATSRB.This is
point S. Any point other than S lies outside the zone of feasible production.
Every linear programming maximization problem has its dual problem, that of
minimization. The original problem is known as the primal problem, which always has its
dual.If the primal problem pertains to maximization, the dual involves minimization, and
vice versa.
Now we take another planning problem. Suppose the planner undertake a project which
aims at minimization of costs. Two types of goods X1 and X2 are to be produced. Let the
planners attach weights of 3 and 8 to units of these goods. Let there be 2 units of resource
X1 and 6 units of resource X2. Let the production of 1 unit of 1 unit of X1 use 1 unit of
input C1 and 2 units of input C2. Similarly, Let the production of X2 use 2 units of C1
and 8 units of C2. The problem can now be set in the linear programming form as;
Maximise 3X1 + 8X2 (R, i.e. revenue)
Subject to the constraints
X1+2X2<2
and 2X1+8X2<6
and none of these quantities is negative. The optimal solution is X1+2, X2= ½ and R=7
The dual problem is ;
Let P1 be the imputed price of X1 and P2 be the imputed price of X2, minimize 2P1+6P2
(C, i.e. cost).
Subject to the constraints
P1+2P2>3
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and 2P1+8P2>8
and that none of these prices is negative. The optimal solution is:
P1=1i=1/2 and C=7.
These are the shadow or dual prices. But as all values have been imputed to the two
resources, the maximum value of the objective function C must equal R. Hence C=R=7.
FIG 4.3
Graphically line AB represents P1+2P2=3 and line CD respresents 2P1 + 8P2=8. The
feasible solutions lie on or above the thick line AZD in figure 4.3. The optimal solution is
at point Z where the isocost (dotted line) RK passes through the point of intersection of
AB and CD.

Graphically illustrate the optimal solution of LP as used in this section.
3.2 LIMITATIONS OF LINEAR PROGRAMMING

Linear programming has turned out to be a highly useful tool of analysis in development
planning. But it has its limitations. As a matter of fact, actual planning problems cannot
be solved directly by the LP technique due to a number of restraints. Firstly, it is not easy
to define a specific objective function. Secondly, even if a specific objective function is
laid down, it may not be so easy to find out the various social institutional, financial and
other constraints which may be operative in pursuing the given objective. Thirdly, given
122
a specific objective and a set of constraints, it is possible that the constraints may not be
directly expressible as linear inequalities. Fourthly, even if the above problems are
surmounted, a major problem is one of estimating relevant value of the various constant
co-efficients that enter into an LP problem, i.e. population, prices, etc. Fifthly, one of the
defects of this technique is that it is based on the assumption of linear relations between
inputs and outputs. This implies that inputs and outputs are additive,
multiplicative and divisible. But the relations between inputs and outputs are not always
linear. In real life, most of the relations are non-linear. Sixth, this technique assumes
perfect competition in product and factor markets. But perfect competition is not a
reality.Seventh, the LP technique is based on the assumption of constant returns in the
economy. In reality, there are either diminishing or increasing returns.
To further buttress this point, it is a highly mathematical and complicated technique. The
solution of a problem with linear programming requires the maximization or
minimization of a clearly specified variable. The solution of a linear programming
problem is also arrived at with the ‗Simplex method‘ which involves a large number of
mathematical calculations. It requires a special computational technique, an electric
computer or desk calculator. Such computers are not only costly, but also require experts
to operate them. Mostly, the LP models present trial-and-error solutions and it is difficult
to find out really optimal solutions to the various economic problems.

Highlight the various limitations known to you when considering Linear Programming.
3.3 USES OF LINEAR PROGRAMMING IN PLANNING

Linear programming as a tool of economic development is more realistic than the input-
output approach. In input-output analysis only one method is adopted to produce a
commodity. It does not take into consideration the bottlenecks (constraints) which a
development project has to face in underdeveloped countries. But in linear programming
a definite objective is set to maximize income or minimize costs. All possible processes
123
or techniques are taken into account for achieving the desired objective. This necessitates
even the substitution of one factor for another till the most efficient and economical
process is evolved. So projects and techniques which are too uneconomical to implement
are not undertaken. By assuming certain constraints, linear programming as a tool of
development planning is superior to the input-output technique. In underdeveloped
countries, the planning agencies are faced with such constraints as the lack of sufficient
capital and machinery, growing populations, etc. Resources exist that cannot be used
properly for want of the co operant factors. Linear programming takes to due note of
these constraints and helps in evolving an optimum plan for attaining the objectives
within a specified period of time. Thus the LP technique has been used for constructing
theoretical multi- sector planning models for countries like India. Such models extend the
consistency models of the input-output type to optimization of income or employment or
any other quantifiable plan objective under the constraints of limited resources and
technological conditions of production.
In practice, however, the LP technique is being used in solving a limited number of
economic problems in developing countries. This is due to the lack of proper personnel
for working out mathematical equations and for operating highly mechanical computers.
Mostly the LP technique has been found to be extremely useful for sectoral planning in
developing countries, for example, in selecting optimum alternatives in respect of
location and technologies in industries, transport, and power or in farm management.
This technique is being used in farm management for determining the optimum
combination of different crops e.g Livestock and crops. The objective function used in
such studies is either the minimization of costs or the maximization of income. The
constraints are set by pre-determined levels of demand or the availability of resources
such as raw materials or capacity. Besides, this technique is being used for the solution of
diet problem where the aim is to minimize costs, given the values of minimum nutrients
of the diet and the prices of products as constraints. It is also with the LP technique that
the transport problems is being solved by the railways, airways and transport companies
with regard to the selection of routes, transportation of goods, allocation of the means of
124
transport ( i.e. railway, wagons, aircrafts,trucks etc.depending on the type of transport
under study).Again, this technique is used to assign jobs to the work force for maximum
effectiveness and optimum results subject to constraints of wages and other costs.
Similarly, purchasing, assembling, production and marketing problems are being solved
through the LP technique in order to minimize costs and maximize profits, given the
various constraints in the case of each problem. However, for an extensive use of this
technique for development planning, developing economies will have to depend upon
larger resources of trained personnel, and finance.

Mention the uses of Linear Programming in plan programming that you know.
4.0 CONCLUSION
From our discussion so far on the linear programming technique and its application in
planning, we can deduce the following facts:
Mostly the LP technique has been found to be extremely useful for sectoral planning in
developing countries, for example, in selecting optimum alternatives in respect of
location and technologies in industries, transport, and power or in farm management.
5.0 SUMMARY
In this unit, we have attempted to discuss the linear programming technique and its
application in planning, Production capacity technique of LP, Limitations of linear
programming technique and the uses of linear programming technique in planning. Also,
from the point of view of our discussion, you have learnt that the main aim of linear
programming is to find out optimal solutions to available constraints posed by available
resources. I believe your understanding of this unit will prepare you for the last unit of
this last module. Therefore, read ahead
125
Discuss briefly the methods of linear programming models used in plan formulation by
planners.
.
126

Pumark Nigeria Ltd.
Ibadan.
127
UNIT III
PROJECT SELECTION TECHNIQUE OF COST-BENEFIT ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 Optimal investment allocation:.
3.2 Problems of multiple objectives
3.3 Assumptions underlying project selection
4.0 Conclusion
5.0 Summary
I.0 Introduction:
This is the last unit of the last module of this course. Our discussion in the last unit has
finally taught us what we need to know about linear programming technique and its
usefulness in formulating economic plan. Therefore, our discussion in this unit will
describe the Projects Selection technique of cost-benefit analysis, optimal investment
allocation, Problems of multiple objectives in investment allocation and assumptions
underlying project selection. It is important for us to take closer attention to the
explanations given in this unit for easy assimilation and understanding.
2.0 OBJECTIVES
128
- Optimal investment allocation.
- Problems of multiple objectives
- Assumptions underlying project selection
3.0 MAIN CONTENTS

3.1 OPTIMAL INVESTMENT ALLOCATION:
Once the planning authority has laid down the optimum investment target called the
optimal investment allocation ( whether derived from the availability of resource or the
desired rate of growth of national output), the next important step in this macrophase of
plan formulation is to determine the investment priorities. This relates to the composition
of investment or the sectors and projects that should receive priority in the plan. In
economics, such a decision belongs to the area of optimal investment allocation. It is
therefore the responsibility of the planning authority to choose and priorties well on the
best and needed projects that can fit into their plan to satisfy the condition of optimal
allocations of projects. However, this is based on the economic system that is prevalent in
such nation be it developed or developing.
3.1.1 Types of economic system:

In a decentralized economic system, or a free enterprise economy, investible resources
would be attracted by those sectors or projects that offers the highest rates of return on
capital invested. However, in a planned process of economic development, such a
criterion of investment allocation may be a very faulty guide to the optimization of the
objective of the plan. For one thing, in a LDC, the price mechanism may not act as
perfectly as it does in developed countries. For another, there may be considerable
divergence between social and private costs and benefits of investment in different
sectors.
129
A less developed country can therefore not afford to draw up a plan in which the
investment pattern happens to be inefficient or suboptimal. How do we decided whether
an investment pattern is an efficient or inefficient one? The simple test would be that in
which no sector or project included in the plan should yield a lower marginal discounted
income per unit of the scarce resources used than any sector or project excluded from the
plan, otherwise, it will be difficult to maximize the present value of (discounted) income.

What do you understand by Optimal investment allocation ?
3.2PROBLEMS OF MULTIPLE OBJECTIVES IN INVESTMENT

ALLOCATION:-
Infact, the selection of priority sectors and projects for inclusion in a plan is
complicated by the existence of multiple objectives underlying a plan. These objectives
may be, for instance, the maximization of the rate of growth of real national income or
per capital output, creation of maximum employment opportunities, maximisation of
consumption or some balance of payments objectives. There is no single technical
criterion which would optimize all the objectives of a plan at the same time.
The second problem that arises is that even if we attach greater importance to a
single objective, like the maximization of the rate of growth of national output, there is
no unanimity about the most suitable investment criterion to be used. The planner has to
choose a suitable investment criteria in order to make a choice therewith of priority
sectors and projects.
Even after the choice of investment criterion has been made, the selection of priority
areas of development is not a straight one. A scholar argued that investment planning in
the LDCs consists of ranking projects in accordance with their benefit-cost ratio in
descending order and choosing projects till the investible funds available for the plan are
exhausted. This gives one the impression of a plan being little more than a more
collection of projects. Such a method of assigning priorities obviously goes away with all
130
the macro-economic exercises that are necessary for investment planning. Even then,
little can authority of Less Developed Countries do in this regards.
Discuss the problems of multiple objectives as encountered under optimal investment
allocation.
3.3 ASSUMPTIONS UNDERLYING PROJECT SELECTION.

The above method of ranking projects and sectors in order of their Cost- benefit ratios
for determining priorities is based on two principal assumptions, namely
(1) That each project or sector of the economy is an independent entity and
(2) That it has no indirect costs and benefits ratio. This, however would be an over-
simplified way of assigning priorities and would give us a less than optimal result. This
would be clear from the following example.
Suppose on the basis of Cost-benefit-ratios the following five sectors have been ranked
for inclusion in an hypothetical plan.
Table 4.1
Types of Project Cost/Benefit Ratio
1. An irrigation project .91
2. An iron and steel mill; .89
3. A coal mining project; .88
4. A soil conservation scheme; .71
5. A railway project .69
131
Now, out of this list, if the total savings available would allow for the inclusion of
only two schemes in the plan. Which ones can be selected? A superficial answer
could be that since the first two projects yields a higher Cost-benefit ratio, these
should receive priority. But it will be noted that projects(1) and (4) are
complementary and would result in a greater increase in output, if undertaken
simultaneously, than (1) and (2) or project (3) and (4). Similarly, the case of projects
(2) and (5) are complementary in that iron and steel project compliment railway
project and as such should be given higher priority of selection.
The reason behind it is that various projects and sectors, especially in a LDC, are
characterized by complementary on external economies and diseconomies. Different
sectors of an economy are interdependent because of which the nature and significance of
a project changes dramatically. In order to evaluate the priority of a sector or project,
These externalities must be internalized, i.e. taken note of any calculations that are made
to determine the investment priorities.
TABLE4.2
PROJECT SELECTIONS AND COST-BENEFIT RATIO STRUCTURE
ProjectsCBR Complementary Structure
-1 2 3 4 5
1. An Irrigation project .91 - 67.5 39 99.2 74.0
2. An Iron and Steel Mill.89 67.5 - 41 37.4 90.7
3. Coal Mining Project .88 39.0 41.0 - 47.0 81.1
4. Soil Conservation schm .71 99.2 37.4 47 - 69.0
5. A railway Project .69 74.0 90.7 81 69 -
In the above CBR (cost-benefit ratio) table, we can confidently select projects that are
complementary in the structure. Project 2 and 5 i.e Iron and Steel is a complement to
Railway project which has a CBR of .89 and .69 and a complementary structure of 90.7.
132
Invariably, if the planning authorities were to select projects , they will choose projects
that has high CBR and are complementary to achieve optimum and efficient resources
allocation.
As an Economic planner, rank and discuss the projects above according to order of
priorities to you and make your comments.
4.0 CONCLUSION
From our discussion so far on project selection technique of cost-benefit analysis
, we can deduce the following facts:
That after the choice of investment criterion has been made, the selection of priority areas
of development is not a straight one and that investment planning in the LDCs consists of
ranking projects in accordance with their cost-benefit ratio in descending order and
choosing projects till the investible funds available for the plan are exhausted.
5.0 SUMMARY
In this unit, we have attempted to discuss Projects Selection technique of cost-benefit
analysis, optimal investment allocation, Problems of multiple objectives in investment
allocation and assumptions underlying project selection . Also, from the point of view of
our discussion, you have learnt that if the planning authorities were to select projects ,
they will choose projects that has high CBR and are complementary to achieve optimum
and efficient resources allocation. I believe you have intimate yourself with your course
material and have been able to acquire the needed knowledge that is expected of you. I
therefore encourage you to read more for proper impartation and assimilation of this
course.

133
Describe what project selections is all about in plan formulation using the cost-benefit
analysis.
134

Pumark Nigeria Ltd.
Ibadan.
135

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NATIONAL OPEN UNIVERSITY OF NIGERIA

Dr. Peter Medunoye

Working through This Course

Textbooks and References

Tutor-Marked Assignment (TMAs)

Final Examination and Grading

Course Marking Scheme

How to Get the Most from This Course

Tutors and Tutorials

planning as contained in the course material of Economic planning I. In this course,

development aspirations to accelerate the pace of a country‘s social, economic and

political development. More specifically, it is a study that shows the technique of

targets and objectives within a specified period of time.

objectives in Less Developed Countries of which Nigeria is one. It is also to provide a

and real life application in executing economic planning policies.

include: Understanding techniques, model and requisites of economic planning, Input-

output analysis in planning, Social accounting matrix, General equilibrium and

computable general equilibrium models of economic planning, Linear programming

technique and cost benefit analysis in planning .

(ii) To teach you the concept of Input-Output Analysis in Plan Programming.

(iii) To expose you to the concept of Linear Programming Techniques in planning.

Computable General Equilibrium Models in Economic Planning.

unit through the sets of objectives in each one

The objectives of this course are:

executed using the common

quantitative development models for Economic Planning of a country most especially

developing countries by the planning authorities i.e the Government.

techniques of Economic Planning.

Working through This Course

books and other materials on the course.

course material subsection.

Twelve study units in all.

Module 1: Understanding Techniques, Models and requisites of Economic Planning.

Unit 1: Meaning of models in Economic Planning

Unit II: Rationale and prerequisite for successful planning

Unit III: Categories of development planning models in focus

Module 2: Input-Output Analysis in Planning.

Unit 1: Meaning of Input-Output technique

Unit II Input –Output model

Unit III: Uses, Limitations and importance of input-output analysis to planning

Unit 1 Social accounting matrix technique of economic planning

Unit II General equilibrium model of economic planning

Unit III Computable General equilibrium model of economic planning

Module 4: Linear Programming Techniques and Cost-benefit analysis in

Unit 1: Introduction to the concept of Linear Programming technique

Unit 2: Linear Programming technique and its application in Planning

Unit 3: Project selection technique of cost-benefit analysis

Textbook and References

Michael P. Todaro and Stephen C Smith (2011).Economic development, pearson

Michael P.Todaro: Development planning, models and methods, Chapter 2-3.

this Course Guide in the section on assessment.

Assignment 1 - All TMAs‘ question in Units 1 – 3 (Module 1 )

Assignment 2 - All TMAs' question in Units 4 – 6 (Module 2)

Assignment 3 - All TMAs' question in Units 7 – 9 (Module 3)

Assignment 4 - All TMAs' question in Unit 10 – 12 (Module 4).

should guide against falling behind in your work.

assignments; second, there is a written examination.

will count for 30 % of your total course mark.

Tutor-Marked Assignments (TMAs)

constitute 30% of the total score.