This document discusses the dual gap analysis model for analyzing savings-investment gaps and foreign exchange gaps that constrain economic growth in developing countries. It explains that if a country's targeted growth rate requires higher investment than can be supported by domestic savings, there will be an ex-ante savings gap that can be filled by foreign aid inflows. Similarly, if the foreign exchange required for imports to support the targeted growth rate exceeds potential foreign exchange earnings, there will be an ex-ante foreign exchange gap that can also be filled by foreign aid. The dual gap analysis is useful for developing countries to estimate capital requirements and calculate how much investment and savings can be generated domestically versus relying on foreign resources.

1. DUAL GAP ANALYSIS

2. SAVING-INVESTMENT

4. Hollis chenery
Extention of harrod-domar model
Seperate indipendent constrain
 Targeted growth
Foreign aid –FILL GAP –ACHIEVE GROWTH
S<required investment
Net export earning

6.  Targeted growth is high ,invt is high
Domestic saving depends upon distribution of
income
LDC import needed for development
Export determine world price and quantity .that
change weather and natural condition

7. Y
F2
F
F1
0
G1 G G2 X
TARGETED GROWTH RATE
A
B
E
I-S
C M-X
D
Exantegap

8. We cannot reduce import.becuase larger
consumer demand and capital requirement
Chenry suggest restrictions on pattern of
consumption,distribution of incom,growth of
employment and exchange rate
Bridge adjustment without foreign aid
But retard growth
Resourse optimally allocated ,only saving
constrain

9. Assuming only capital goods import and consumer goods
produce domestically ,some structural rigidities
No substistution possible b/t capital goods and domestic
factors of production
No substistution possible b/t d/f consumer goods in
consumption
S gap > FE gap –saving constrain
FE gap> S gap - FE constrain
 Foreign aid removing saving gap by inflow of K.

10. In long run amount of foreign aid requirement will=
increasing in invt and increasing in saving by generated
by rising income.
Saving gap disappear when targeted growth rate
sustained
Foreign exchange gap will disappear when export rise
and cover the required import for targeted growth of
economy.

11. LIMITATIONS
 increasing domestic saving cannot utilise a substitute
for required foreign exchange to maintain invt.
It assume a country cannot follow export promotion
and import substistution
It assume structural rigidities and nonsubstitutabilities
b/t d/f types of goods
 as fullemployment---invt in k goods through inflation--
-lead inflation

12.  Does not consider absorptive capacity of economy.
Best in calculating foreign aid requirement. But
difficult in fixing import requirement,
potential domestic saving
expected foreign exchange earning.

13. IMPORTANCE
Higly useful in LDC inorder to estimate
1. capital requirement
2.how much generate with economic devt.
3. how much need from abroad.
LDC’s are low saving ,low invt. Economies. So
existing rate of saving not enough for development.
To mobilise domestic savings,budget surplus not
sufficient

14.  certain capital goods cannot domestically produced.
Capital goods not domestically produced import
foreign aid foreign exchange gap BOP crisis
external debt further foreign exchange gap
narrow import capital

15. Help to understand required foreign resource to fill the
gap in FE GAP to develop the effort of the country
S-I > FE Narrowed by inflow of capital
FE > S-I Foreign aid to more invt.
Increases and saving generated
by rising income
Help to achieve the targeted growth rate of economy.