PART 4 THE FIRM AND ITS ENVIRONMENT

Objectives:

1. Describe the criteria in classifying the Phases of

economy.
2. Determine the phases of Economy according to Walt
Rostow
3. Discuss the different phases of economic development.
ECONOMIC DEVELOPMENT

• From a policy perspective, economic

development can be defined as efforts
that seek to improve the economic well-
being and quality of life for a community
by creating and/or retaining jobs and
supporting or growing incomes and the tax
base.
PHASES OF ECONOMIC DEVELOPMENT
Criteria in Classifying Phases of Economic Development
A. Means of Livelihood
1. Hunting and Fishing Phase – Ancestors obtained food by
hunting and fishing.
2. Pastoral Phase – Presence of large number of livestock.
3. Handicraft Phase – Items or objects were made by
skilled and trained manual laborers (sculptures, jewelry,
furniture)
4. Agricultural Phase – Concept of land ownership. Began to
work as a farmer or a fisherman.
5. Industrial Phase – Presence of manufacturing companies.
Machineries were used.
PHASES OF ECONOMIC DEVELOPMENT
B. Extent of Economic Activity
1. Household Economy – The needs of the family
were satisfied first through the contribution of
the family members.
2. Village Economy – Economic and social
relations spread among various families.
3. National Economy – Grouping of villages into
bigger and broader social
PHASES OF ECONOMIC DEVELOPMENT
C. Medium of Exchange
1. Barter Economy – Done during primitive era, exchange was done
which was the direct exchange of goods for goods, services for
services, goods for services or services for goods.
2. Money Economy – There came to circulate in the market certain
objects, such as bars of metal, buttons, tools, and utensils which were
stable in value, durable and generally accepted by the public. Money was
used as the “medium of exchange”.
3. Money and Credit Economy – Due to increase in volume and
frequency, it became imperative to allow others to purchase one’s
goods or engage one’s service with payments to be paid at some future
date. Credit – is the power to obtain economic goods and services in
exchange for the promise to pay the agreed equivalent.
WALT ROSTOW
• Walt Rostow took a
historical approach in
suggesting
that developed
countries have tended
to pass through 5 stages
to reach their current
degree of economic
development.
The Five Stages
Traditional society

• The stage of traditional society was that of the pre-1700s, when

most societies operated in a relatively stable state and
productivity didn't rise or fall dramatically.
• Trade existed, such as the spice route between Asia and Europe,
but it was timely, costly, and more of a luxury than a necessity.
Because technology was very limited, meaning little more than
handmade tools, transportation, and the printing press, producing
goods was very human capital intensive, which created large gaps
in income inequality.
Stage 1: Traditional Society
• Dominated by subsistence agriculture
• Agricultural based economy
• Intensity labor and low levels of trading
• Having a population that has no scientific perspective on the world
and technology
Preconditions for take-off

• There is a period of transition between the traditional society and

a society that 'takes off,' and for a certain time that society is
establishing the preconditions for take-off.
• The best example of this is Europe during the 1700s and 1800s. A
number of factors came together to make productivity increase;
for example, population hit a critical mass that made agriculture
take up such a high percentage of labor, which provided
opportunities for the establishment of educational institutions,
banks, and a market for luxury goods.
STAGe 2: Preconditions for take-off

• The process of development begins

• The economic activities are influenced by a group or leader
• The start of some urbanization
• This results in an increase in productivity
Take off

• When the preconditions for take-off are met, a society can take
off. Educated individuals start inventing new processes and tools,
and access to capital through financial markets and banks make it
possible to produce goods and services on a larger scale. This
requires a different type of skill set from human laborers, so
instead of growing food they are producing goods.
Stage 3: Take off

• Short period of extensive growth

• Industrialization begins. Manufacturing more important part of the
economy
• Introductions to technical innovations – economic rise
• Agriculture progressed to commercial rather than subsistence
Drive to maturity

• The drive to maturity is the one of Rostow's five stages that has a
general length of time associated with it. According to Rostow, the drive
to maturity is about a 60 year time period from the take-off until the
economy reaches the age of high mass consumption. During this time, an
economy (the collective of all consumers and producers) is able to
reinvest 10-20% of what it creates into more production.
• Processes are improved, quality of life is improved, technology and new
ideas continue to become more central to society while the cost of
producing the needs for survival (e.g. food, shelter) becomes a smaller
part of the economy because of scale, and most importantly, the middle
class grows at the quickest rate of any economic class.
Stage 4: Drive to Maturity

• Growth becomes self-sustaining – wealth generation enables

further investment in value adding industry and development
• Industry more diversified
• Increase in levels of technology utilized
Age of high mass consumption

• Finally, when an economy reaches maturity, they enter the age of

high mass consumption. If you think of the United States, much of
Europe, and some of Asia today, you can see the definition of a
society in the age of high mass consumption.
• Both the quantity and quality of products and services increase. A
society or economy in this stage is able to export their production,
bringing in money from other countries that helps the economy
grow larger than their actual consumption.
Stage 5: Age of High mass consumption

• Rapid expansion of tertiary industries and welfare facilities

• Employment in service industries grows but declines in
manufacturing
• Industry hits to the production of durable consumer goods
The role of business in relation to the
economy
• Imagine a world where we have to produce everything that
we consume-food, clothes, vehicle, furniture etc.-It not only
takes time and effort but oftentimes huge resources, in
order to build or manufacture what we consume.
• Business obtains such resources as materials, labor, and
equipment to be able to produce goods and services. As a
result of business, commerce and markets, consumers are
able to live more comfortably and improve their standard of
living conditions.
The role of business in relation to the
economy

• Consumers are able to enjoy a variety of goods and

services because producers and suppliers compete
for markets and regularly attempt to improve their
products and services so that the same will be
patronized.
The Different Phases of Economic
Development

1. Malthusian
2. Government-led
3. A la Kuznets
4. Human capital-based
5. Post demographic transition
Written Output

CONCEPT MAPPING

On a ½ sheet of paper, draw a concept map

on the Economic development or Phases of
economy. Write a significant learning for
each of the phases. Insert drawing or
caricature for each phase.
Assignement

• Be ready for the culminating activity and Chapter

Test 2