Transcript Chapter 5 - Economic Transformation and Growth

Economic Transformation
and Growth
Dr. George Norton
Agricultural and
Applied Economics
Virginia Tech
Copyright 2006
Objectives



Discuss economic transformation
that occurs with development
Review production economics
concepts
Identify potential sources of
economic growth
Economic Transformation
Increase in the size of the non-agricultural
sector (income and employment) relative
to agriculture
What are the Causes?
1.
Increased agricultural productivity
2.
People spend more of their income on
non-food items as development proceeds
(income elasticity of demand for food
declines)
3.
Specialization in agriculture (produce
less non-ag goods on the farm) and in
the industrial sector itself
Agriculture’s share of national
income versus national income
70
Agricutural as a share of GDP
60
50
40
30
20
10
0
0
4000
8000
12000
16000
20000
24000
GNP per capita
28000
32000
36000
40000
Agriculture’s share of employment
versus national income
Agriculture's Share of Total Employment
(Percentage 2002)
100
90
80
70
60
50
40
30
20
10
0
0
5000
10000
15000
20000
25000
30000
GNI Per Capita (US$ 2002)
35000
40000
45000
Factors influencing the speed
of economic transformation



Rate of growth of the
total labor force
Rate of growth in nonfarm jobs
Proportion of labor
force initially in
agriculture
What happens to the number and
size of farms? (U.S. example)
Implications


ET means share of agriculture falls
Number of farmers rises and then
falls
• Initial rise in number of farmers against a
fixed land base means a rise in poverty
until productivity increases occur in
agriculture
• Initial rise in # of farmers means
environmental pressures
• Technologies needed during rising and
falling stages may differ
Implications for Agriculture



E.T. affects the size of the
agricultural labor force, farm size,
and per capita income in agriculture
E.T. depends on growth in food
production
Labor will bear some adjustment
costs
Important Production
Economics Concepts

Production function

Marginal product

Law of diminishing returns

Isoquant
Typical Production Function
Quantitu of labor
Typical Isoquant Structure
C
A
L
1
200
L
B
2
150
100
50
0
C
1
C
2
Quantity of capital
Units of output (Y)
Marginal Product Curve
0
Marginal product
K
J
Units of input (x)
What is the law of diminishing
returns?
Why is the law of diminishing
returns important?
Major Sources of Economic
Growth

Population growth

Increased utilization of natural resources

Capital accumulation

Increases in scale or specialization

Increases in efficiency

Technological progress

Human capital and institutions
Population
Natural Resources
Capital Accumulation


Increase in human-made physical
items such as buildings, machinery,
tools, etc.
Increase in human capital such as
educated population
Where does it come from? Savings and
investment
What is efficiency
improvement?
Getting more for the same
inputs by allocating them in a
better way
What are the three types of
efficiency?

Technical

Allocative (MR = MC)

Market
Technical Efficiency
Qty. of
output
(e.g. rice)
Output at each
level of
input *
use
Technically efficient point
Technically inefficient
*
0
K
J
Qty. of input
(e.g. labor)
Allocative (Price) Efficiency
Qty. of
output
(e.g. rice)
line whose
slope is
P(labor)/P(rice)
Highest-profit
point along the
production
function
Qty. of
input #1
(e.g. labor)
Lowest-cost
point along the
isoquant
line of slope P(machines)/P(labor)
Qty. of input
(e.g. labor)
Qty. of input #2
(e.g. machinery)
Market efficiency

Refers to the type of economic
system and degree of market power
• A relatively free market with many
buyers and sellers tends to have greater
market efficiency as no one or small
number of buyers and sellers can
control the prices.
Examples of new technologies




Higher yielding plant
varieties
Improved methods of pest
control
More efficient thresher
Improved livestock feeding
system
Technological Progress
Output
Input
Technological Progress
Price
D
S1
S2
Quantity
Scale or specialization


Can raise productivity and facilitate
trade
Division of labor and specialization
can make workers more efficient
• Even more important in industry than
agriculture, but also important for
agriculture
Human Capital and Social
Institutions


Human capital: education, improved
health
Institutions: Rules of the game
Examples: laws, grades and
standards, social organizations
Conclusions



Economic transformation is inevitable
as development occurs
Several major sources of economic
growth with their relative importance
having changed over time
Both technological and institutional
change are vitally important; without
institutions to provide incentives
there will be little growth