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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 ofnational income-closed economy
-market structure: perfect competition with traditional firms operating, limit pricing monopolist with a modern firm operatinga big push may also be necessary when there are:-intertemporal effects-urbanization effects-infrastructure effects-training effectstraditional 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 involvedWhy 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 possibleSummary-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 arecosts of training, and other shared intermediate inputs)Further problems of multiple equilibria-Inefficient advantages of incumbency-Behaviour and norms-Linkages-Inequality, multiple equilibria and growthMichael 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 countriesEx)-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 labourHausmann 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 1ststage, encouraging movement out of inefficient sectors and into more efficient sectors in the 2ndstage3 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)-