(5.5) Structural transformation

Question 1

Describe sectoral shares as the economy develops

Answer 1

• Agriculture declines
• Manufacturing follows ‘hump’ shape/inverted U (increases then declines)
• Services rises steadily
• Trend for both employment and value added (output)

Question 2

Describe sectoral productivity growth

Answer 2

• Highest in agriculture
• Medium in manufacturing
• Lowest in services

Question 3

What do differing sectoral productivity growth rates allow for?

Answer 3

• The reallocation of labour
• Drives structural shift

Question 4

What did Arhur Lewis identify about structural transformation?

Answer 4

• As economies develop, labour moves out of agriculture and into modern sectors
• Traditional agriculture held vast surplus labour

Question 5

What did Lewis mean by ‘surplus labour’?

Answer 5

Workers whose marginal product was near zero

Question 6

What is the key parameter in Lewis’ model of structural transformation?

Answer 6

ā - subsistence requirement for food

Question 7

2

Interpret this equation

Ca = consumption of agricultural goods, Cna = consumption of non-agricultural goods

Answer 7

• derive utility from consumption of agri goods AND non-agri goods
• utility from consumpion of agri goods only comes AFTER surpassed subsistence level

Question 8

1

Describe the impact of increasing ā in this equation

solution at equilibrium (markets clear)

Answer 8

More labour needed to produce agricultural goods

Question 9

Describe the impact of increasing Aₐ in this equation

Aₐ = productivity for agri products

Answer 9

• As Aₐ rises, ā/Aₐ → 0
• so Lₐ falls to αL̄
• So, agricultural productivity frees up labour to move into non-agri sectors