Definitions Flashcards
(122 cards)
1
Q
Utility
A
the satisfaction that consumers obtain from using up a good or service
2
Q
Law of diminishing marginal utility
A
as a consumer increases their consumption of a product there will be less extra utility derived from subsequent levels of consumption
3
Q
Equi-marginal principle
A
consumers maximise their utility where their marginal valuation for each product is the same
4
Q
Equi-marginal principle assumptions
A
- consumers have limited incomes
- consumers will always behave in a rational manner
- consumers seek to maximise utility
5
Q
Optimal purchase rule
A
- A consumer will consume until the point where P = MU
- If P > MU the consumer will not buy the good as it is too expensive
- If P < MU the consumer will buy more as they seek to maximise utility
6
Q
Utility theory
A
Consumer equilibrium occurs when a consumer maximises total utility
Equilibrium occurs where the law of equi-marginal returns is met
NB: TU is maximised when MU = 0
NB: A rational consumer will not consume past the optimal purchase rule, MU = P
7
Q
Utility theory assumptions (4)
A
- Consumers are rational, sometimes consumers are irrational and make decisions based on non-price factors
- Utility may be measured and will stay static over time
- The law of diminishing returns always holds true (sometimes the 2nd or 3rd level of consumption has the most utility
- Consumers always have perfect information
8
Q
Indifference analysis assumptions
A
- There are only 2 goods
- Your income is fixed
- Prices of the 2 goods are fixed
9
Q
Rationality and slope of indifference curves
A
A rational consumer will opt for the highest utility curve
The slope of the indifference curve represents the extent to which the consumer is willing to substitute one good for another (MRS*)
*Marginal rate of substitution
10
Q
Substitution effect
A
following a price change, a consumer will substitute the cheaper good for the one that is now relatively more expensive
11
Q
Income effect
A
following a price change, a consumer has higher real income and will purchase more of this good
12
Q
Limitations of the indifference curve model
A
- Consumers may choose between many more than 2 goods
- Consumers may express their wants in rank order or prefrence instead of indifference
- Indifference curves assume that consumers act rationally, this is not always true
13
Q
Indifference curve
A
represents the same total utility for a different combination of 2 goods
14
Q
Economic efficiency
A
optimal allocation and use of resources (allocative and productive efficiency)
15
Q
Productive efficiency
A
producing goods in the most efficient manner with the lowest production costs
16
Q
Allocative efficiency and the 3 types
A
Social
producing the right goods demanded by society in the right quantity
Allocative (private sector) - where every good is produced up to the point where the marginal utility for the last unit consumed is the marginal cost of it
Pareto, where it is not possible to make someone better off without making someone else worse off
17
Q
Market failure
A
when the market fails to achieve economic efficiency, poor allocation of resources or goods produced in a poor manner
18
Q
Types of market failure
A
- Fails to accommodate externalities
- Fails to provide public goods
- Subject to a lack of information or misinformation
- Existence of monopolies or a lack of competition
- A lack of property rights
19
Q
Externalities
A
the positive/negative spillover effect on an innocent third party not involved in the production or consumption of the good for which they receive no compensation
20
Q
External cost/benefit
A
the monetary value of a negative/positive externality
21
Q
Dynamic efficiency
A
keeping up with the latest technologies to keep production as efficient and technologically possible
22
Q
Effectiveness of a tax is dependent on.. (5)
A
- Degree of elasticities
- Size of tax
- International implementation?
- Enforceable?
- Support from other policies?
23
Q
Tax adv. & disadv.
A
Adv.
1. Tax revenue
Disadv.
1. High tax may destroy industry (employment & economic growth)
2. Hurts small firms more than large firms
3. Indirect taxes are typically regressive
4. Difficult to measure external cost and calculate tax equal to this
24
Q
Subsidy adv. (3) & disadv. (4)
A
Adv.
1. Market based decision
2. If large it is likely to be effective
3. Popular policy
Disadv.
1. Cost of subsidy (opp cost)
2. DWL
3. May lead to dependancy
4. Difficult to measure external benefit and calculate subsidy equal to this
25
Information failure
Occurs when people have inaccurate or incomplete data and make the "wrong" decisions
In a competitive market it assumed that there is perfect information
26
Causes of information failure
1. Not knowing long term consequences
2. Complexity
3. Unbalanced knowledge
4. Price information (consumers unable to quickly, cheaply and efficiently find the lowest price)
27
Policies to address information failure
Compulsory labelling, awareness campaigns, industry standards, performance league table
28
Issues with information provision
1. Requires govt expenditure
2. Information may be innacurate or unknown
3. Assymetrical information
4. Information changes over time
5. Information is subject to political influences
29
Regulation problems
1. May be expensive to enforce
2. Setting the right level may be difficult
3. If regulation is too difficult problem may not be solved
4. If regulation is too harsh then it may eliminate the industry
5. Regulation may not generate revenue
6. Sometimes regulation relies on the industry self regulating
30
Principal agent problem
Where the decision maker is different from the person/institution who is affected by the decision
31
Stages of cost benefit analysis
1. Identification of all costs and benefits
2. Place monetary value on all costs and benefits
3. Forecast future costs and benefits where appropriate
4. Make a decision (choose the project with the highest net social benefit)
32
Types of firms
Sole trader - unlimited liability
Partnerships - unlimited liability
Private company - limited liability
Public limited company - limited liability
33
Time periods in production
Moment - not possible to change supply
Short run - one factor is fixed and becomes a limiting factor
Long run - all factors of production are variable
Very long run - the state of technology may change
34
Short run production laws
1. Division of labour - automation (machines), inc in labour specialisation (MPL), cooperation between tasks (inc productivity)
2. Law of diminishing returns - if a variable factor is added (labour) to a fixed factor (capital), total output will increase at a diminishing rate
35
Economic costs (3)
Accounting costs (explicit costs):
normal costs associated with setting up and running a business
Inputted costs (implicit costs):
the opportunity cost of revenue that may be gained from assets a business owns
Normal profits:
the normal return an entrepreneur would expect to receive for being in this type of business
36
Fixed and variable costs
Fixed costs do not vary with output and variable costs increase as output increases
37
Break even and shutdown
Break even: Where the profits are equal to the costs
Shutdown: Where a firm experiences no benefit for continuing operations and shuts down temporarily or permanently
Between breakeven and shutdown is where a firm is making a loss but will continue to operate in the SR
38
Profit maximisation
Occurs where MC = MR
39
Firm operations with perfect competition
Firms will make normal profits in the long run
Firms may make a supernormal profit in the short run but this will not last as new firms will enter the market and increase competition
If with perfect competition firms make a subnormal profit, they will leave the market when fixed factor inputs need replacing
40
Sales maximisation
Occurs where AR = ATC, or the point where output is as large as possible
41
Revenue maximisation
Where the dotted line up from where MR = 0 (crosses the x-axis) meets the AR curve
42
Firm growth methods (3)
Vertical integration - a firm takes over a firm at a different stage of production
Horizontal integration - a firm takes over a firm at the same stage of production
Lateral integration - a firm uses its network to create a new and separate business
43
Market structures: Perfect competition (examples, no. of firms, competition and profits)
Examples:
agriculture and stock market, or any highly competitive market
No. of firms:
many buyers and many sellers
Competition:
Perfect competition and no barriers to entry
Profits:
Normal profits made in the long run and firms are price takers
44
Market structures: Monopolistic competition (examples, no. of firms, competition and profits)
Examples:
most goods sold in supermarkets, restaurants, hair salons
No. of firms:
many buyers and many sellers but with differentiated products
Competition:
Brand and advertising competition, non-price competition, weak barriers to entry
Profits:
Normal profits made in the long run
45
Market structures: Oligopoly (examples, no. of firms, competition and profits)
Examples:
airlines and car companies
No. of firms:
many buyers and few sellers
Competition:
price and non-price competition, collusion, price-fixing, strong barriers to entry
Profits:
Supernormal profits made in the long run
Consumers are price searchers
46
Market structures: Monopoly (examples, no. of firms, competition and profits)
Examples:
NZ post, microsoft, NZ rail
No. of firms:
legal monopoly has greater than 25% of market share, pure monopoly is one seller
Competition:
very strong barriers to entry, typically no advertising
Profits:
Supernormal profits made in the long run
Firms are price makers
47
Market structures: Monopsony (examples, no. of firms, competition and profits)
Examples:
a beef farm that only sells its beef to one supermarket
No. of firms:
only one buyer
Competition:
buyer sets demand and price, little competition
Profits:
huge profits for the dominant supplier
48
Explanation of kinked demand curve for oligopolies
Due to interdependence of firms, firms will set prices, advertise and change its behaviour with the knowledge that the other firms will respond
49
Competition solutions for oligopolies (4)
1. Perfect collusion
2. Informal collusion
3. Price war
4. Non-price competition
50
Game theory (prisoner's dilemma)
Reflective of the way that firms in an oligopoly will act to ensure their firm succeeds
Example:
By both not advertising they will each only make 8 million in profits
If one advertises and the other doesn't, the firm that advertised will make 20 million and the firm that didn't will only make 2 million
If both advertise they will both make 12 million.
Hence it makes sense for them to both advertise
51
Reason for existence of monopolies (5)
1. High start up costs (natural monopoly)
2. High advertising costs
3. Patents and copyrights provide a barrier
4. Owenership of raw materials
5. Branding
52
Adv. and disadv. of monopolies
Adv.
1. EOS and EO scope
2. Positive usage of excessive profits to benefit society
Disadv.
May become complacent and lack productive efficiency (X-inefficiency)
53
Price discrimination
Occurs when a firm sells the same products to different consumers at different prices
54
First degree of price discrimination
Producer charges each consumer separately and just up to the price that they are prepared to pay
CS is turned into revenue for the monopoly (monopoly steals all CS)
55
Second degree of price discrimination
This is often used in wholesale markets where lower prices are charged to customers that purchase large quantities (bulk buying discounts)
56
Third degree of price discrimination
When a producer has a method of keeping different sectors of customers apart eg. time, place, age, ID
These sectors must have different PEDs for their demand curves
57
Contestable market
Where there are weak barriers to entry and exit so monopolies and oligopolies do not exploit their market power
Fear of contestability prevents them from overcharging customers and making excessive profits
Fear of "hit and run" where a large competitor will quickly enter the market and erode profits ensures that imperfect market structures behave like competitive markets
58
Natural monopolies
One with a continuous falling long run average costs, where there is always EOS by the firm being larger
59
How to control monopolies (3)
1. Prevent mergers and aquisitions
2. Lump-sum tax on monopoly profits
3. Regulation (govt laws) - regulating prices and permitting greater competition in the market
60
Adv. (4) and disadv. (3) of regulations
Adv.
1. Backed by law
2. Revenue raised by firms
3. Easy to understand
4. Ban is a strong policy
Disadv.
1. Regulatory capture (who checks regulations are adhered to)
2. May be expensive to enfore
3. Regulation may be too harsh and destroy the industry or too little and ignored
61
Growth maximisation
Where a firm seeks to gain as much market share as possible, in hopes of gaining market power to exploit consumers
62
Reason for existence of small firms (6)
1. Graph
2. Owner wishes to keep control of business
3. Small niche market
4. Personalised services
5. There may be volatile demand and greater risks of expanding
6. A small firm may be flexible and quick to adopt new ideas and technology
63
Price leadership
The firm in an oligopolistic market structure who sets the price for the other firms to follow, the price leader is effectively the industry price setter
64
Pension reforms (3)
1. Raise retirement age
2. Means test state pension, check income and wealth
3. Regulations to ensure individuals contribute to their retirement
65
Policies to reduce income inequality (5)
1. Progressive income tax system
2. Increase NMW
3. Govt direct provision of public goods and transfer payments
4. Using a tax credit system
5. Govt providing generous benefits to low income earners
66
Laffer curve
Trickle down effect: if you cut tax for high income earners they will spend more which creates jobs for others
Counter: this did not occur in the 1980s, there is also a tendency to 'trickle out' (switch to imports or more imports)
67
Policies to reduce wealth inequality (2)
1. Wealth tax
2. Capital gains tax
68
Poverty trap and solutions (3)
Where there is little or no incentive to move off benefits
1. Make it difficult to stay on benefits
2. Cut benefits
3. Make work pay, inc NMW
69
Theories of wage determination (2)
1. Economic rent and transfer earnings (treats labour market like a factor market)
2. Using marginal product theory
70
Marginal revenue product of labour
the extra revenue gained from the extra output produced from hiring an additional unit of labour
71
Net advantages (1,10)
(Reasons other the money that workers choose a particular occupation)
1. Job satisfaction
2. Fringe benefits (company car, staff discount)
3. Sociable hours
4. Corner office, work environment
5. Convenience
6. Job promotion (prestige)
7. Pension provision
8. Holidays
9. Helping society
10. Flexible hours - work from home
72
Transfer earnings
The amount paid to keep a factor in its present occupation
73
Economic rent
The amount a factor earns over economic rent and is the area between the wage rate and transfer earnings (not to be confused with PS or CS)
74
Effects of NMW is dependent on (4)
1. Level of NMW
2. Elasticity of Ld and Ls
3. Level of unemployment
4. Labour market flexibility
75
Labour market flexibility
Wages are able to increase or decrease based on increases or decreases in Ld respectively
Wages tend to be sticky in a downward direction, employees tend to fire staff rather than drop wages.
Occupational and geographical immobility prevent labour market flexibility
76
Occupational immobility
When it is difficult for labour to change between jobs due to a lack of skills or qualifications required for that job.
Education and training can improve occupational mobility
77
Geographical immobility
When labour is not prepared to move to different regions for employment, likely because housing costs are too high.
Subsiding housing costs in certain regions, tax breaks and encouraging businesses to set up in small regions can improve geographical mobility.
78
Macro policies (1.3, 2.3, 3, 4)
1. Fiscal policy (altering taxation, govt spending, govt borrowing)
2. Monetary policy (set interest rates, monitor money supply, monitor exchange rate)
3. Trade policies
4. Supply side policies
79
Macro objectives (5)
1. Strong economic growth (3-5%)
2. Low stable inflation (1-3%)
3. Full employment (1-3% U)
4. Satisfactoy BOP (+current account)
5. Fair income distribution
## Footnote
1 ∝ 3, 1 (1/∝) 2, 1 (1/∝) 4
80
Methods of measuring GDP (3)
1. Income method (sum of all incomes)
2. Expenditure method (AE = C + I + G + X - M)
3. Output method (value added of each industry)
81
GDP
the monetary value of all goods and services produced in a domestic economy over time
82
Keynesian economic ideas
As income increases so does consumption but at a lesser rate
An increase in govt spending would lead to an increase in RNI, increasing output and reducing unemployment.
Govt should intervene in an economy to reduce unemployment
83
Keynes and the multiplier
Assumed MPC > 0 hence multiplier > 1, meaning that any injection would lead to a greater increase in RNI than the injection, reducing unemployment
84
Paradox of thrift
When individuals collectively save more and spend less during economic uncertainty, it can lead to reduced economic activity, job losses, and lower total savings.
Saving is individually rational, it can have detrimental effects on the overall economy if everyone does it simultaneously.
This emphasis the need for government intervention, like increased spending, to stimulate demand and counteract the paradox during economic downturns.
85
Full sector Keynesian 45º line model of AE
Add govt spending and exports
Subtract savings, taxes and imports
86
Problems with keynesian demand (5)
1. Govt needs to borrow to spend which may lead to an increase in national debt
2. Predicting this size of the multiplier is difficult as predicting leakages is very difficult
3. Time-lag - multiplier process takes an unpredictable amount of time
4. Keynesian policies assume the private sector will not anticipate the effects of an inc in G
5. Crowding out - If G^ then it will create inflation and r^ so C will decrease and the currency will appreciate, increasing imports and decreasing exports
87
Keynesian beliefs (5)
1. Economy is not self correcting and requires govt intervention
2. During a recession the private sector can not be trusted to spend, the only option is fiscal policy
3. Founder of demand management and counter cyclical policies
4. Unemployment can be reduced by expansionary fiscal policy
5. Animal spirits greatly interfere with economic policy (animal spirtis is consumer behaviour and confidence)
stagflation confused this theory
88
Causes of inc in AD (6)
1. Expansionary fiscal; G inc, T dec
2. Expansionary monetary; dec r
3. Decrease in protectionism by trade partners
4. Inc in consumer confidence
5. Dec in tax on profits (inc in I)
6. depreciation
89
Causes of ins in AS (6)
1. Education and training
2. Inc in retirement age
3. Tax breaks on resaerch and development
4. Immigration
5. Subsidies for production
6. Depower trade unions
90
Key debate between keynesian and monetarist views
Keynesian:
Economy has full employment gaps that are not self correcting and require expansionary fiscal policy
Monetarist:
Economy is self correcting and will tend to Yf without govt intervention, there is no need for stimulus policies
Key question:
Is the economy self correcting or not?
Keynes is needed during a recession
Monetarists state market forces will bring economy back to equilibrium and excessive govt intervention is not required
91
Charatceristics of money (5)
Durable
Portable
Divisible
Exchangable
Acceptable
92
Functions of money (4)
1. Medium of exchange
2. Store of value
3. Unit of account
4. Standard of deffered payment
93
Money supply
Notes and coins and bank notes
94
Monetarist vs Keynesian views on the quantity theory of money
Monetarists believe that money is used at a constant or predictable rate and keynes believed that the velocity and quantity varies during a recession or boom
95
Quantity theory of money
QTM is an identity and related changes in the money supply lead to changes in nominal GDP
If nominal GDP is up by 3% then the money supply is up by 3%
96
Keynesian liquidity prefrence theory - money demand motives (3)
1. Transactional demand for money (holding money to purchase commodities with, affected by the level of GDP)
2. Precautionary demand for money (money held in case things go wrong in the future, affected by the level of GDP)
3. Speculative demand for moeny (assets are held in the form of money so that speculation can take place)
1 and 2 are active balances
3 is an idle balance
When int rates are high and bond prices are low, people will buy bonds
When int rates are low and prices are high, people will sell bonds and hold onto money
97
Result of increase in Ms
As Ms inc, int rates will dec till the economy gets stuck in a liquidity trap. Int rates are so low that they are expected to inc and reduce bond prices, people will stick with a liquidity prefrence rather than bonds.
At some point during an economic slow down monetary policy loses its potency and int rates can not be lowered anymore. Keynes argued that during a recession the only option is fiscal stimulus.
98
Criticisms of LP theory (4)
1. Speculative motive - do people hold reserves to buy bonds
2. Time-lag between Ms changes and impact on int rates
3. Some economists argue that Ms changes have a more predictable impact than LP analysis suggests
4. Without speculative motive LP analysis is much the same as other models
99
Loanable fund theory - money supply and money demand
Money supply: money kept in long term savings that a consumer wants returns on, as r goes up so does the incentive to save
Money demand: this money is then used for investment purposes, typically by firms
100
Criticisms of loanable fund theory (5)
1. The economy operating at Yf is unlikely to always occur
2. Assumes that income and savings are independent of eachother
3. Do people actually hold money? Are they in a position to do so?
4. Does this model rely on real or nominal figures? (people borrow and lend using nominal rates, not real rates)
5. GDP is not always at Yf
101
Monetary policy instruments (5)
1. Int rates
2. Money supply, Qe
3. Change lending criteria
4. Cash ratio - bank reserve assets
5. Quantative and qualitative lending criteria
102
Interest rate transmission mechanisms
r^ then AD dec:
1. can help reach inflation target (1-3%)
r^ then c dec:
1. higher borrowing cost (income effect)
2. encourages saving (substitution effect)
3. wealth effect (less wealth in assets)
4. negative effect on consumer confidence (animal spirits)
5. deters new loans
r^ then I dec:
1. higher borrowing cost
2. dec in business confidence
3. less real gdp, decelerator effect
r^ then currency appreciates:
1. attracts foreign savings (hot money)
2. x dec, m inc (j curve adjustment, better then worse)
103
Unemployment
Those who are of working age that are willing and able to work who are seeking full time employment
Labour force is those who are either employed or unemployed
104
Ways to measure Unemployment (2)
1. Those on benefits
2. Labour force survey
105
Types of unemployment
Natural rate of unemployment:
Frictional unemployment - natural turnover of labour, people graduate/get promoted/move regions, made worse with a lack of information
Structural unemployment - occupational or geographical immobility
(- )
Seasonal unemployment:
eg. fruit pickers and ski instructors
Sunset (mature or declining) and sunrise (new or emerging) industries lead to greater seasonal u
106
Unnatural U (3)
Real wage unemployment - this occurs because the real wage is too high
Keynesian unemployment - demand deficient/ cyclical due to economic turn down or recessions
Voluntary unemployment
107
Reasons (3) and policies (3) for real wage unemployment
Reasons:
1. Militant trade unions driving up high wages
2. NMW
3. Poor forecasting
Policies:
1. depower trade unions
2. deregulate NMW
3. supply side policies
108
Explanation of cyclical u graph (3) and a policy to correct
As wage falls so does AD in the economy
with less output being produced there is less demand for workers
wages and u are interdependent
#
Expansionary fiscal policy
109
Reasons for long term unemployment, employee (5), employer (3)
Employee:
1. low self esteem
2. financial issues
3. depression
4. outdated skills
5. may prefer leisure
Employer:
1. suspicions on reasons for unemployment
2. shift production to use less labour
3. don't want older unemployed labour as they are perceived to be less productive
110
Reasons and policies for gender pay gap
Reasons:
1. discrimination
2. career breaks and opt for family friendly jobs
3. type of jobs chosen
4. glass ceiling
Policies:
1. regulations against discrimination
2. free childcare
3. education - promotion for women
111
Balance of payments definition
a set of accounts that record all transactions that occur between a country and the rest of the world
112
Balance of payments structure
BOP: current ac, financial ac
Current ac:
Balance of trade in goods and services (visibles and invisibles respectively)
Investment income (primary income) (Interest, profits, dividends)
Current transfers (foreign aids and grants)
Capital transfers (immigrants sending money abroad)
Financial ac:
Portfolio investment (shares, bonds, debentures)
Direct investment (eg. setting up a company in NZ not just buying shares or bonds)
Banking transactions
Current ac + financial ac + balancing item = 0
Credits (in)
Exports
Inward FDI
Foreign tourists
Debits (out)
Imports
Outward FDI
NZ tourists abroad
Ideally you want a positive current account and a negative financial account, a positive current ac funds outward FDI
113
Policies to correct BOP imbalances (to improve current account)
3D's and supply side policies
Depreciation with j-curve adjustment, will depend on ML condition, if PEDx + PEDm > 1, the a/c will improve
Deflationary policies; expenditure reducing, dec in govt spending, inc in int rates
- issues is this reduces economic growth and raises unemployment
Direct controls; tariffs, quotas, production subsidies, red tape
114
Factors that affect international trade (3)
1. exchange rate
2. relative inflation rate
3. Trade productivity; labour productivity (education), capital productivity (technology)
115
Exchange rates (4)
Price or value of one currency in terms of another
Nominal (not adjusted for cost of living)
Real (adjusted for cost of living, inflation)
Effective (trade weighted)
116
Factors that affect the exchange rate (4)
1. Trade (X and M), trade competitiveness
2. Relative inflation rate (r inc, appreciation), affects international competitiveness, raw material costs
3. Relative interest rates, affects hot money flows
4. Speculation; political threats/instability (depreciates), civil unrest/political coups (depreciation)
117
Advantages and disadvantages of fixed and floating ER
Fixed:
Adv.
certainty
Disadv.
needs to hold foreign reserves, can't use r for inflation
changes in foreign reserves may affect money supply
Floating:
Adv.
no need for planning (govt intervention)
r can be used for inflation
ER changes do not affect money supply
Disadv.
uncertainty
trade risk
118
Does economic growth lead to economic development (4)
1. impact of corruption
2. rising income and wealth of inequality
3. threats to environmental sustainability
4. investment may dominate consumption
119
Economic structure of economy (4)
1. Primary sector (fishing, farming, mining)
2. Secondary sector (manufacturing, construction)
3. Tertiary sector (services)
4. Quarternary sector (intellectual services, IT, technological innovation)
120
Balanced growth
Range of industries relied on to generate the wealth of a country, this is important for economic development as in the case of a crisis affecting one industry, the country still has other revenue sources
121
Rostow's stages of growth model
1. Traditional - agricultural society
2. Pre-conditions for takeoff - primary industries become mechanised, saving is now possible and investment begins
3. Take-off - new investment enables industrialisation and there is a growth in manufacturing and a decline in agriculture
4. Maturity - economic growth now becomes self-sustained through savings and profit, savings and retained profits fund future growth
5. Mass consumption - high levels of output allow for consumerism and growth of the tertiary sector, the growth in each sector enriches the other sectors and growth fuels itself
122
Lewis 2-sector growth model and criticisms
1. Assumes that diminishing returns leading to low labour productivity is inevitable in the rural sector
2. Low rural wages trigger migration from rural workers to the urban sector
3. These workers transfer into developing an urban secondary sector, which fuels growth and eventually becomes self-sustaining
Criticisms:
1. New tech may improve rural labour proudtivity and raise wages
2. The model does not account for high levels of unemployment in developing rural areas
3. Funding must be available for industrialisation to occur, it is unlikely that local industries will fund the growth of the industry
