Classroom Economics

Reference: Nurkse, Ragnar (1961). Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press Vicious Circle of Poverty Vicious circle of poverty refers to a phenomenon wherein a poor country remains in the poverty trap due to its initial low levels of income. As low income level implies a small capacity to save (most of the income is spent on consumption), there is a lack of sufficient capital formation or investment in the country. Due to lack of investment in machinery, infrastructure and other capital goods, the productivity of labor remains low. This prevents them from earning higher incomes and thus the overall income level of the country remains perpetually low. Then how can a poor, subsistence farming economy may achieve higher flow of real income capable of being directed to capital formation?  Foreign investment  is necessary to bring initial improvement in productivity and real income, that will increase domestic saving and break the...