Modern sector there are increasing returns to scale

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traditional sector, 1 workers produces 1 unit of output. Modern sector there are increasing returns to scale and fixed cost (min number of workers) - domestic demand: each good receives a constant and equal share of consumption out of national income - closed economy
- market structure: perfect competition with traditional firms operating, limit pricing monopolist with a modern firm operating a big push may also be necessary when there are: - intertemporal effects - urbanization effects - infrastructure effects - training effects traditional sector production function= total cost in terms of wages that you pay to all workers, also income received by traditional firm = 1 - wages + good and services will increase - A by increasing number of workers a modern firm increases profit so will produce up to that point (traditional will move to this sector) - Produce up to B - If w2 if you compare cost and revenue, revenue is lower than cost, need to produce at w2 can’t sell if more than that, negative profit if below - No firms will do w3 since cost is higher no equilibrium - Main solution usually the government gets involved Why can the problem not be solved by super-entrepreneur? - Capital market failures - Cost of monitoring managers- asymmetric info - Communication failures - Limits to knowledge - Lack of any empirical evidence that would suggest it’s possible Summary - Raising total demand - Reducing fixed costs of later entrants - Redistributing demand to later periods when other industrializing firms sell - Shifting demand toward manufacturing goods (usually produced in urban areas) - Help defray costs of essential infrastructure (similar mechanism can hold when there are costs of training, and other shared intermediate inputs) Further problems of multiple equilibria - Inefficient advantages of incumbency - Behaviour and norms - Linkages - Inequality, multiple equilibria and growth Michael Kremer’s O-ring theory of economic development - Production is modeled with strong complementarities among inputs - Positive assortative matching in production
- Implications of strong complementariness for economic development and the distribution of income across countries Ex) - HR department has 4 workers. 2 H-types and 2 L-types - Q= q1q2 - How to allocate? HH,LL or HL LH - H^2 + L^2 > 2HL because (H-L)^2 >0 - So with strong complementarity, it always pays to do assertive matching - H being high-sky labour, L being low-sky labour Hausmann and Rodrik: a problem of info - It is not enough to say that developing countries should produce “labour intensive products”, because there are thousands of them - Industrial policy may help to identify true direct and indirect domestic costs of potential products in which to specialize by: encouraging exploration in 1 st stage, encouraging movement out of inefficient sectors and into more efficient sectors in the 2 nd stage 3 building blocks of the theory, and case examples of their reasonableness in practice - Uncertainty about what products can be produced efficiently (India success in info technology unexpected) - Need for local adaptation of foreign technology (shipbuilding in south Korea) -

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