Focuses on the mechanism by which underdeveloped

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Focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from traditional subsistence agriculture to a more modern more urbanized and more industrially diverse manufacturing and service economy The Lewis 2-sector model : theory of development in which surplus labour from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labour, promotes industrialization and stimulates sustained development - Surplus labour: labour that can be withdrawn from the traditional agricultural sector without any loss of output - Marginal product: increase in total output resulting from use of 1 additional unit of a variable of factor of production, surplus labour in this model is defined as workers who marginal product is 0 - Production function: technological relationship between the quantity of a good produced and the quantity of inputs required to produce it - Average product: total output or product divided by total factor input - Self sustaining growth: economic growth that continues over the long-run based on saving, investment and complementary private and public activities Assumptions: 2 sectors - Traditional overpopulated rural subsistence sector characterized by 0 marginal labour productivity - High-productivity modern urban industrial sector into which labour from the subsistence sector is gradually transferred - Capitalists reinvest all their profits - The level of wages in urban industrial sector is constant and determined as given premium over a fixed average wage in the traditional agricultural sector - At urban wages, modern sector employers can hire as many surplus rural workers as they want without fear of rising wages - Real wage in a rural area is determined by average product of labour - Real wage in modern area is determined by marginal product of labour The focus of this model is on both the process of labour transfer and the growth of output and employment in the modern sector Look up diagrams Production function: shows how total output is determined by changes in the amount of labour, given fixed quantity of capital and unchanging traditional technology - The modern sector is represented by production function for modern sector and modern sector marginal labour product curves (that are derived from production function)
- Output is a function of a variable labour input for a given capital stock and technologu - In the Lewis model, modern-sector capital stock is allowed to increase as a result of the reinvestment profits by industrial capitalists - This will cause the total product curves to shift upward - Under the assumption of perfectly competitive labour markets in the modern sector, these marginal product labour curves are in fact the actual demand curves for labour Lewis 2-sector model continued - Given a fixed supply of capital in the initial stage of modern sector growth, the demand curve for labour is determined by marginal product - Because of profit-maximization, modern-sector employers are assumed to hire labourers

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