ECO 2117 Chapter Notes - Chapter 3: Subsistence Agriculture, Surplus Labour, Capital Formation
20 Aug 2016
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Chapter 3: Classic Theories of Economic Growth and Development
3.2 Development as Growth and the Linear-Stage Models
-post WWII, there was no readily available conceptual apparatus with which to analyze the
process of economic growth in agrarian societies
-had experience from the Marshall Plan
-emphasize the central role of accelerated capital accumulation (capital fundamentalism)
-stages of growth model was developed by Rostow
-principle strategy of development was the mobilization of domestic and foreign savings to
generate investment to accelerate economic growth
-Harrod Domar model: more investment = more growth (AK model)
-been applied to policy issues facing developing countries
-says every economy must save a certain proportion of its national income
-new investments representing net additions to the capital stock are necessary
-this will bring about corresponding increases in the flow of national output (GDP)
-capital-output ratio shows the units of capital required to produce a unit of output over a
given period of time
-net savings ratio refers to savings expressed as a proportion of disposable income over
some period of time
-the rate of growth of GDP is determined by the net savings ratio and the national capital-
output ratio
-the more an economy is able to save and invest, the greater their growth and vice versa
-labour is assumed to be abundant in developing countries
-obstacles to the HD method:
-there is a low level of capital formation in developing countries
-savings and investments could be compensated with foreign aid or investment
-becomes a measure for justifying transfers of capital and technical assistance from
developed to developing countries
-criticisms of the stages model:
-more saving and investment is not a necessary condition (must be present for an event to
occur) or a sufficient condition (will guarantee that an event will occur)
-these models implicitly assume the existence of same attitudes and arrangements across
all developing countries
-there was an insufficient focus on reducing the capital-output ratio which entails increasing
efficiency with which investments generate extra output
3.3 Structural Change Models
-focuses on how underdeveloped economies transform their domestic economic structures
from a heavy emphasis on traditional subsistence agriculture to a modern and urbanized
manufacturing/service economy
-employs neoclassical tools of price and resource allocation theory and modern economics
-surplus labour refers to excess labour over the quantity demanded at the going free-market
wage rate
-marginal product: is the increase in total output resulting from the use of one additional unit
of a variable factor of production
-the Lewis model:
-divides the developing country into a modern and traditional sector
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-traditional sector is overpopulated, rural and characterized by zero marginal labour
productivity
-they have surplus labour that can be drawn from the zone without any loss of output
-modern sector is highly productive and industrial
-focus of the model is on process of labour transfer and the growth of output and
employment in the modern sector
-the speed in which the expansion occurs is determined by the rate of industrial
investment and capital accumulation in the modern sector
-this investment is due in part by the excess of modern-sector profits over wages on the
assumption that capitalists reinvest all their profits
-is assumed that the level of wages in the urban industrial sector was constant, in which the
supply curve of rural labour to the modern sector is considered perfectly elastic
-production function illustrates how the total output of food is determined by changes in
the amount of labour given a fixed quantity of capital and unchanging technology
-assumes all workers share equally in the output so that rural real wage is determined by
the average and not the marginal product of labour
-the modern sector capital stock increases as a result of reinvestment of profits by industrial
capitalists
-assumes that at urban wages that are above rural average incomes, modern sector
employers can hire as many surplus rural workers as they want without fear of rising wages
-the process of self sustaining growth from the modern sector is assumed to
continue until all surplus rural labour is absorbed into the new industrial sectors
-“Lewis turning point” refers to when additional workers are to be withdrawn from the
industrial sector because of the declining labour-to-land ratio (meaning the marginal
product of rural labour is no longer zero, or is negative)
-criticisms of the Lewis model
-does not fit the institutional and economic realities of most contemporary developing
countries
-implicitly assumes the rate of labour transfer and employment creation in the modern
sector is proportional to the rate of capital accumulation
-is sometimes charged with being “antidevelopmental” as all the extra income and output
growth are distributed to the few owners of capital, while income and employment levels of
the masses remain unchanged
-assumes surplus labour exists in rural areas while there is full employment in urban sectors
-assumes the diminishing returns in the modern industrial sector
-the patterns of development analysis focus on the process through which the economic,
industrial and institutional structure of an underdeveloped economy is transformed over time
to permit new industries to replace traditional agriculture as the engine of economic growth
-transformation is required of production as well as changes in the composition of consumer
demand, international trade, and resource use
-emphasizes both domestic and international constraints on development such as a country’s
resource endowment, population size, physical size, government policies and objectives,
access to external capital, technology and international trade
-the international constraints are different for today’s developing countries
-recognizes that developing countries are part of an integrated international system that can
promote or hinder its development
-identify several parts to the development process: shift from agriculture to industry,
accumulation of physical and human capital, emphasis on diverse manufactured goods rather
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Document Summary
Chapter 3: classic theories of economic growth and development. 3. 2 development as growth and the linear-stage models. Post wwii, there was no readily available conceptual apparatus with which to analyze the process of economic growth in agrarian societies. Emphasize the central role of accelerated capital accumulation (capital fundamentalism) Stages of growth model was developed by rostow. Principle strategy of development was the mobilization of domestic and foreign savings to generate investment to accelerate economic growth. Harrod domar model: more investment = more growth (ak model) Been applied to policy issues facing developing countries. Says every economy must save a certain proportion of its national income. New investments representing net additions to the capital stock are necessary. This will bring about corresponding increases in the ow of national output (gdp) Capital-output ratio shows the units of capital required to produce a unit of output over a given period of time.
