Models Flashcards
(7 cards)
Explain the Lewis Model
There is a rural subsistence sector, with 0 marginal productivity so surplus labour and a urban industrial sector, with higher productivity and profit driven.
Migration is driven from rural to urban due to wage differentials, absorbs more labour due to reinvestment of profits.
Wage determined by average product of labour
Lewisian turning point occurs when surplus labour is fully absorbed by the urban sector. After, urban must offer higher wages leading to rising wages across the 2 sectors.
Explains rural-urban migration and how a rural economy can transition to an industrial economy.
Manufacturing labour generates profits which are reinvested into tech and knowledge which means demand for labour shifts out.
Explain the Fei Ranis model
Extension of Lewis model - emphasises agricultural growth is just as important as industrial growth through 3 phases.
Phase 1) Surplus labour in agricultural sector with marginal product of labour near 0. Industrial sector draws on this labour without causing a decrease in agricultural output.
Phase 2) As labour transfers to industrial, marginal product of labour in agriculture rises, so productivity increases which contributes to growth in both sectors. Labour absorption in industrial sector must outpace population growth to avoid a Malthusian nightmare.
Phase 3) Surplus agricultural labour is exhausted, and economy transitions to self sustaining growth with rising wages in both sectors.
Explain the Harris-Todaro model
Critiques the assumptions of the Lewis + Fei Ranis models and builds on it - assumption that surplus rural labour can be smoothly and efficiently absorbed into urban sector
Answers why migration continues even when there is high unemployment in the urban area.
Uses expected income, as probability of securing job is not 100% due to existing unemployment. Even if probability is low, is wage is high, expected urban wage may still be higher than rural wage, so people still migrate, especially when they have long time horizons.
Since not enough jobs, urban unemployment increases, but migration continues until expected urban income = rural income, migration stops but still lots of unemployment in the city as urban wage > market clearing wage so people may turn to informal sector work. So urban quality of life may be equal to or worse than in rural, which are risks that migrants consider. Rural migrants are much more likely to be unemployed due to lack of formal qualifications and unskilled work experience, move to the city with little preparation.
Paradox of migration: while the desire to improve economic circumstances and provide for loved ones drives migration, many find themselves trapped in urban poverty cycles, compounded by rapidly growing urban population and lack of infrastructure to support them.
Policy Paradox: Policies that create urban jobs increase migration due to increase probability of getting a job, creating more urban unemployment.
From rural POV push factors
- Weak institutional frameworks, inefficient agricultural practises and lack of resources leads to rural stagnation
Pull factors to urban
- Higher wages (assumption of fixed urban wage in HT model)
- Perception of better life
Pull > Push
Explain the Kuznets inverted U hypothesis
Gini coefficient against GNI/capital
- as country undergoes economic growth, income inequality worsens then improves.
Early growth in industrial sector is limited to small population, then more labour is absorbed by it.
Critiques:
Depends on nature of development
Empirical evidence from Taiwan doesn’t match up.
Explain the Solow model
Neoclassical explanation of long run growth
Y = A * f(K,L)
Y - Total output/GDP
A - Total factor productivity
K - Capital stock
L - Size of labour force
Assumption - Diminishing returns to individual factors
Growth can occur via increase in capital, capital changes via investment or depreciation
Steady state - when capital per worker remains constant
Conditional convergence - countries w similar savings rates, access to tech etc will converge to same steady state level of income per capita
Solow - tech as an exogenous factor, driver of sustained per capita growth in the long run
Explain the Romer model
Endogenous growth theory
Develops on the Solow by explaining where tech progress comes from - RnD
Ideas/Knowledge as a crucial input distinct from physical capital and labour
1) Non rivalrous - so can be used by one without preventing use by another
2) Partially excludable - Could be prevented from using via patent
Non rivalrous nature means possibility of increases aggregate returns - doesn’t rely on outside factors for growth, explains why tech improves and focus on knowledge
