structural approach : lewis’s model of unlimited supply of labor

ECONOMIC DEVELOPMENT THEORIES – STRUCTURAL APPROACH : LEWIS’S MODEL OF UNLIMITED SUPPLY OF LABOR

The Discussant (Group 2): Khairunnisa Abd Samad G1117656 Rininta Nurrachmi G1015702 Ibrahim Foughali G1210727

Presented on October 2012

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Discussion Flow

Introduction

What is Dual Economy?

Answer the Question

Q1. Basic Assumption of the Model

Q2. How the Model argues to sustain Economic Growth

Q3. Strength and Weakness

Q4. The relevance of the Model to Economic Growth and Experience of any Developing Country

Comments for Presenter

- Overall Content

- Slide

Conclusion

- Dualism in the model

- Implication

- Pros & Cons

- In Reality

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What is a dual economy?

• Concept created by J. H. Boeke

• Asymmetry between two parts of economy: traditional (agricultural) and modern (manufacturing) sector

• W. A. Lewis (1954) put the dual economy concept at the center of a model of development (see picture)

• Model extended and formalized by John Fei and Gustav Ranis (1964)

• The Lewis dualistic labour surplus model became the orthodox theory of development

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Sir William Arthur Lewis (1915-1991)

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Q1. Basic Assumption of The Model

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Agriculture

(Traditional ) Sector

• Surplus of labor

Industrial

(Modern) Sector

• Capture the excess labor

Transfer of surplus labor

Assumption 1. There is surplus labor in the sense that MPLA is zero, 2. the rural real wage is determined by the average and not the

marginal product of labor, also Wmdn > Wtrad, 3. all of profits are reinvested.

Lewis Two Sector Model

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Q2. How the Model Argues

to Sustain Economic Growth

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Lewis Two Sector Model

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Increases in output, wages and

profit

Larger profit

invested

Output expanded

Absorb surplus labor

Employment

increases,

Economy capable of

self - sustaining

growth

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How it Contribute to Economic Growth

Total output rises while total wages and profits increase. The larger area of profits will be invested in expanding production. Modern sector expands absorbs pool of surplus labor. Increasing the total capital stock, shifting the total product and labor demand curves, and raising the level of modern-sector employment. Economy capable of self-sustaining growth.

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Q3. Strength and Weakness of Model

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Strength

Balance growth between 2 sectors (dualism) The model had implication for income distribution The model applied to labor movement across countries, along with movements among two sectors in the closed economy

Weakness

The notion of an exogenous unskilled agricultural real wage “Labor surplus” was interpreted as zero marginal productivity of agricultural labor Surplus exist in rural area is not valid

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Q4. The Relevance of Model to Economic growth and Experience of any developing countries

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China and other countries with heavy population such as India, Bangladesh, Central America and even some parts of sub-Saharan Africa

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Overall Content

Slides

Comments for Presenters

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Dualism in the Model

Application Pros & Cons

In Reality

Conclusion

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