Transcript Recommending a Strategy

Economics 216:
The Macroeconomics of Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lecture 7
Two-Sector
Models of Economic Growth
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Two-Sector Models of Economic Growth vs
Models of the Dual Economy
 Two-Sector
Models: Consumption goods sector versus
Investment goods sector
 Dual Economy Models: Agricultural (traditional) sector
versus Industrial (modern) sector
Lawrence J. Lau, Stanford University
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Two-Sector Models:
The Assumption of Non-Joint Production
 Each
sector produces its output with its own exclusive
inputs--there is no joint production, no externality, no
spillover
 Thus, Yi = Fi (Ki , Li), i = 1, 2
 Production functions satisfy the assumptions of:
 Monotonicity
 Concavity
 Constant
returns to scale
 F(0, 0) = 0
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The Assumption of Full Employment
 There
is full employment of both capital and labor
 Thus, K1 + K2 = K; L1 + L2 = L
 The production possibility frontier in Y1-Y2 space for
given K and L is in general not a straight line
Lawrence J. Lau, Stanford University
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The Assumption of Perfectly Competitive
Output and Factor Markets
 The
values of the marginal products of labor are equal to
the (single) wage rate
 Zero
intersectoral wage differential
 The
values of the marginal products of capital are equal to
the (single) rental rate of capital
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The Assumptions of Perfect Mobility of Factors
 Capital
and labor can be instantaneously reallocated from
one sector to the other
 Identical
rates of depreciation of capital
 No need for forward-looking assumptions (there are no mistakes
that cannot be instantaneously undone)
 Alternative
assumptions:
 Irreversibility
 Putty-Clay
(ex ante substitutibility and ex post fixed coefficients)-vintage of the capital goods matters (vintage can also matter if
there is embodied technical progress)
Lawrence J. Lau, Stanford University
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Assumptions on Savings Behavior
 Capitalists
save and workers consume
 The
assumption of a constant proportion of profits saved will
have almost identical implications
 Profits are reinvested entirely in investment goods; wages are
expended entirely on consumer goods
 Alternative
assumption:
 Savings
rate as a function of real output (per capita) and of the
rate of return on capital
 Savings
behavior determines the outputs of the
consumption and investment goods
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The Existence of
a Steady State Level of the Capital/Labor Ratio
 Possible
instability in two-sector models
 A sufficient (but not necessary) condition for stability is
the “Capital-Intensity Hypothesis”:
 At
the same factor prices, the optimal capital-labor ratio in the
consumption goods sector is higher than the optimal capital-labor
ratio in the investment goods sector
 An
exogenous rate of growth of population
 Labor-augmenting technical progress (identical across the
two sectors)
 Solow (1961)
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Models of the Dual Economy:
Economic Development with Surplus Labor






W. Arthur Lewis (1954), Gustav Ranis and John C. H. Fei (1961),
Dale W. Jorgenson (1961)
Output of the agricultural sector depends only on the quantities of
labor and land (which is assumed to be fixed)
Marginal product of labor = 0 in the agricultural sector
Labor is paid the (institutionally determined) minimum subsistence
real wage w/P1
Output of the industrial sector depends on the quantities of capital
and labor
For given quantity of capital in the industrial sector, labor is
employed in the industrial sector until the value of its marginal
product is equal to w, the minimum subsistence wage rate (> 0)
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The Assumption of Zero Marginal Productivity
of Labor in the Agricultural Sector
 Is
it true?
 Seasonality in the demand for agricultural labor
 Qualitatively what is important about the assumption is
that agricultural output is not appreciably reduced with the
migration of labor from the agricultural sector and that the
real wage rate in the agricultural sector is unaffected by the
migration (hence labor during the labor-surplus phase is
paid more than its marginal product in agriculture)
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The Evolution of a Labor-Surplus Economy
 In
the base period there is only an agricultural sector
 The economy is in long-run steady-state equilibrium:
 Average
real output per capita is equal to the minimum
subsistence real wage
 All output is consumed
 There is no saving, no investment, and no capital accumulation
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An Exogenous Increase
in Agricultural Output per Capita



Technical progress (green revolution), land reform, demographic
change (epidemic, famine, or war), or foreign aid
Excess output over subsistence consumption is invested in the
industrial sector (either by the “landlords” or by the government)
Labor is transferred from the agricultural sector to the industrial
sector until the value of the marginal product of labor is equal to the
minimum subsistence wage rate in the industrial sector (a wage gap
is possible, e.g., cost of living differential, expected wage rate taking
into account the possibility of unemployment, efficiency wage in the
industrial sector)
Lawrence J. Lau, Stanford University
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Capital Accumulation
 Agricultural
surplus further increases because of the
movement of labor from the agricultural sector to the
industrial sector (without a decline in agricultural output)
 Profits in the industrial sector are assumed to be saved and
invested in the industrial sector
 Industrial workers consume only agricultural wage goods
 Movement of labor continues from the agricultural sector
to the industrial sector until the marginal product of labor
increases from zero to the minimum subsistence real wage
in the agricultural sector
Lawrence J. Lau, Stanford University
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The End of the Labor-Surplus Phase
 Once
the marginal productivity of labor in the agricultural
sector rises above the minimum subsistence real wage, the
wage rate faced by the industrial sector will begin to rise
 Labor’s share in the industrial sector will now exceed
minimum subsistence consumption
 Part of industrial output will begin to be consumed
 Per capita real consumption will begin to rise—prior to this
point all increases in output are assumed to be saved—a
plausible assumption
 Agricultural surplus will begin to diminish
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Refinements
 Models
of internal migration (Harris-Todaro)
 Capital in agricultural production
 Terms of trade between the agricultural and industrial
sectors
 Inter-sectoral intermediate inputs
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Multi-Sectoral Models of Growth
 Balanced
growth in steady state (Von Neumann)
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