Methods and Techniques of
Planning
Krishna Khadka
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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
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 technique
For 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 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 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…
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
Plans, programs and projects
Plan
Programme
Programme
Project
Inputs
Project
Process
Project
Project
Outputs
Programme
Project
Cont…
Existence of such relationship calls for
sets of models and techniques at
various levels
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…
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
Macro 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 capitaloutput ratio, the Harrod-Domar model is used to
specify the amount of domestic saving necessary to
generate such growth.
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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 Model
H/D model is a simple analysis of capital
accumulation in the absence of
technological changes. The basic H/D
equation is
g = K/c
Where
g = growth rate of output GDP
K= saving rate (investment rate)
c = capital output ratio
Limitations of H/D
Basic 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 Model
Many 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 Model
The 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 Programming
Mathematical 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…
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 and
Requires skilled manpower
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Input-Output Model
Input 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/technique
No 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 Table
Output
Intermediate
Demand
Inputs
Agri
Indust Ser
Agri
5
50
Indust
15
20
5
40
120
160
Service
5
10
5
20
100
120
Primary
inputs
175
80
95
Total
200
160
120
15
Final
Demand
Total
total
70 130
--
200
Technical coefficient/UCS
Output
Inputs
Agriculture
Industry
Agriculture
0.03
0.31
0.13
(5/200)
(50/160)
(15/120)
0.08
0.13
0.04
(15/200)
(20/160)
(5/120)
0.03
0.06
0.04
(5/200)
(10/160)
(5/120)
Industry
Service
Service
Unit cost structure matrix
A
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 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
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• Other uses: estimation of shadow prices
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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
Technique
The selection of planning technique
depends on:
Nature of the economic system
Level of development of the
country
Availability of the data
Availability of skilled manpower
Availability of technology
others