Theories of Development: A Comparative Analysis

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• Goal explaining the stylized facts of economic
  development
• - sectoral growth
• labors share in ag
• ag share in GDP
• factor product market efficiency

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The Lewis Model of Modern-Sector Growth in a
Two-Sector Surplus-Labor Economy
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Neoclassical Two-Sector Growth Model(Closed
economy)

• Technology Neoclassical production function for
  each sector A, M
• YA TAKAaLAb, YM TMKMcLMd
• Resource endowments
• KA KM K, LA LM L
• Output markets
• Factor markets

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• PPF the combinations of YA, YM obtained from all
  possible allocations of K and L between the two
  sectors, given the parameters of the production
  functions and the resource endowment, i.e.,
• YM F(YA K, L, bA, aAK, aAL, bM, aMK, aML)

YM
YA
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Example PPF Excel model
YM F(YA K, L, bA, aAK, aAL, bM, aMK, aML)
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• Question How to Maximize national income
• I PAYA PMYM
• Efficient production Max income subject to the
  PPF
• Max I PAYA PMYM
• s.t. YM F(YA K, L, bA, aAK, aAL, bM, aMK,
  aML)
• Solution use substitution method
• max PAYA PM F(YA K, L, bA, aAK, aAL, bM, aMK,
  aML)
• First-order condition for YA
• PA PM ?F/?YA 0 ? - PA/PM ?F/?YA

Slope of income line
Slope of PPF
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Two-Sector Model SupplyNote link to supply curve
YM
I/PM
- PA/PM ?F/?YA
YM (I/PM) (PA/PM)YA
I/PA
YA
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Two-Sector Model Demand Note link to market
demands
YM
Community indifference curve
YM (I/ PM) (PA/ PM)YA
YA
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General equilibrium prices equate supply and
demand
YM
I/PM
D(I, PA, PM)
I/PA
YA
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• Explaining sectoral change with growth
• Suppose neutral supply-side growth
• What is implication for equilibrium growth path?

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• Income growth and Engels Law
• I PAYA PMYM
• Differentiate wrt time, given prices
• dI/dt PA(dYA/dt) PM(dYM/dt)
• Divide by I
• (dI/dt)/I (PAYA/I) (dYA/dt)/Y (PMYM/I)
  (dYM/dt)/YM
• Or
• I SA YA SM YM
• Divide by income growth
• 1 SA ?A SM ?M where ?A ?M are income
  elasticities

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Neutral supply-side growth and Engels Law
prices must change to create equilibrium between
supply and demand
YM
D2
Question what if growth is not neutral?
Exercise do the analysis with product and
factor markets and link them to the PPF analysis
(good exam questions!)
D1
2
1
YA
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Analysis of Growth in the Two-Sector Model

• Change in resource endowments
• Population growth
• Capital investment
• Note growth will be neutral or biased depending
  on the productivities of each factor (labor,
  capital) in the two sectors)
• Change in technology
• Factor-neutral growth in A, M sectors occurs if
  there is an increase in TA or TM
• Unbiased growth in the economy occurs when there
  is the same rate of increase in TA and TM over
  time
• Biased growth occurs when productivity increases
  faster in one sector