Methods and Techniques of Methods and Techniques of Planning Planning

Krishna Khadka

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Coverage Coverage

 Explain different methods and techniques of planning

Planning techiques – HD model, LP, I/O method Cost benefit

analysis

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Need for Planning method/tools Need for Planning method/tools

The basic objective of Planning is to allocate the scarce resources into various competing activities so that we get the best return from the limited resources

Allocation of resource call for a techniques or models.These models or techniques or tools are known as

planning techniqueFor discussion in this session, we have selected only the

models which have wide application – used by many countries

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Planning model, tool and techniquePlanning model, tool and technique

 Model, tool and technique some times are interchangeably used

What is model?Model (or equation) are the expression of relationship

between economic variables in algebraic (mathematical) notation

Use of any model requires huge data on different aspects of the economy.

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Linking of Plans, Programs and ProjectsLinking of Plans, Programs and Projects

There has been strong relationship between plan, program and project

What maintains the linkages between plan, program and projects?

Plans, programs and projects are linked with each other

Cont…Cont…

In a sense plan is a systematic compilation of programs and projects that should be done within:

• a given period of time and• in various parts of the nation

The relationship can be expressed as Prospective plan – periodic plans – programs

and projects The following diagram presents the relationship

between plan, program and projects

Inputs Process Outputs

Plan

Programme Programme Programme

Project Project Project Project

Project

Plans, programs and projects

Cont…Cont…

Existence of such relationship calls for sets of models and techniques at various levels

Some Basic Model Some Basic Model

Almost all development plans use more or less formalized macroeconomic model.

Such planning models can be divided into the following categories:

1. Aggregated growth models, models that uses macroeconomic variables such as national employment rate, national export and import.

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Cont… Cont…

2. Disaggregated models. multisector input-output, social accounting, and computable general equilibrium (CGE) models, which ascertain (among other things) the production, resource, employment, and foreign-exchange implications of a given set of final demand targets within an internally consistent framework of interindustry product flows.

3. Finally, the most important component of plan is the specific investment projects within each sector and subsector through the technique of project appraisal and cost-benefit analysis CBA.

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Aggregated Growth Models: Based on Aggregated Growth Models: Based on Macro VariablesMacro Variables

 Developing countries use aggregated growth model in planning their economy

Aggregated growth models provide a convenient method for forecasting output (also employment) growth over a three- to five-years period. Almost all such model represent some variant of the basic Harrod-Domar growth model

Given targeted GDP growth rates and a national capital-output ratio, the Harrod-Domar model is used to specify the amount of domestic saving necessary to generate such growth.

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Cont…Cont…

Typically, the necessary amount of domestic saving is not likely to be realized on the basis of existing savings functions, and

Hence the basic problem is how to generate additional domestic savings or foreign assistance.

For planning purposes, Harrod-Domar model has been typically formulated along the following lines.

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H/D ModelH/D ModelH/D model is a simple analysis of capital

accumulation in the absence of technological changes. The basic H/D equation is

g = K/c

Whereg = growth rate of output GDPK= saving rate (investment rate)c = capital output ratio

Limitations of H/DLimitations of H/DBasic limitations of H/D model are:

•Does not explain the growth rate of sectors

•Does not explain the role of other factors such as labour and technology

•Aggregated models do not provide realistic results

Cobb-Douglas ModelCobb-Douglas ModelMany neo-classical economists thought

that technology is the main source of growth.

Therefore planning technique/model must incorporate variables for the measure of technological changes

Accordingly Cobb-Douglas production function is taken as an alternative planning technique (superior to the H/D Model)

Basic Cobb-Douglas ModelBasic Cobb-Douglas ModelThe functional relationship between variables in the

Cobb-Douglas model can be expressed as: Q = f(K, L, …, At)

While the exaction equation is Q = At K L N

Where Q = production, K = capital, N = labour At = Technolog at tth period of time

+ + = 1 constant return to scale + + < 1 decreasing return to scale + + > 1 increasing to scale

Cobb-Douglas model is also an aggregated model and does not explain the detail sectoral situation of the economy

Mathematical ProgrammingMathematical ProgrammingMathematical programming especially the

linear programming is also used as a planning technique. The basic LP model is

Max GDP = A P1 + M P2 + S P3 ……….. + L Pn

Subject to:a11A + a12M + ……………. + a1nL ≤ F

a21A + a22M + ……………. + a2nL ≤ G

……………………………………………. an1A + an2M + ……………. + annL ≤ K

Cont… Cont…

And the non-negativity conditions are A≥0, M≥0, S≥0, and so on

Although LP is very powerful planning tools it is not very frequently used

It requires huge amount of data andRequires skilled manpower

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Input-Output ModelInput-Output ModelInput output table is a statement of output

of good or service of a sector and the volume of goods and services which are needed as inputs to achieve the given level of sectoral output

Basis of the model/techniqueNo sector of the economy can stand in isolation: each sector has relationship with other sectors of the economy. This is the basis of the computation of input output table and (model)

Transaction TableTransaction Table

Output

Inputs

Intermediate Demand Final Demand

Total

Agri Indust Ser total

Agri 5 50 15 70 130 200

Indust 15 20 5 40 120 160

Service 5 10 5 20 100 120

Primary inputs

175 80 95 --

Total 200 160 120

Technical coefficient/UCSTechnical coefficient/UCS

Output

Inputs

Agriculture Industry Service

Agriculture 0.03 (5/200)

0.31(50/160)

0.13(15/120)

Industry 0.08(15/200)

0.13(20/160)

0.04(5/120)

Service 0.03(5/200)

0.06(10/160)

0.04(5/120)

Unit cost structure matrixUnit cost structure matrix

AA

0.03 0.31 0.13

0.08 0.13 0.04

0.03 0.06 0.04

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Assumptions, uses & limitations of I/O ModelAssumptions, uses & limitations of I/O Model

Assumptions• Single product• Constant return to scale• Sectoral relations only in terms of inputs and

outputs Uses• Economic planning • Sectoral planning• Demand forecasting• National income accounting• Estimation of sectoral value added • Estimation of labour/capital intensity• Estimation of import/export ratio• Other uses: estimation of shadow prices

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Cont…Cont…Limitations • Data problem and Requires huge statistics• Aggregation problem: aggregation of sectors • Selection of prices and aggregation of prices • Composition of the sectors: ag and Manuf • Problems of inventory• Constant return to scale • Other limitations

Selection of Planning Selection of Planning TechniqueTechnique

The selection of planning technique depends on:

Nature of the economic systemLevel of development of the

countryAvailability of the dataAvailability of skilled manpowerAvailability of technologyothers