Structural Transformation

Question 1

What is structural transformation?

Answer 1

• the reallocation of economic activity across agriculture, industry and services

Question 2

What are the Kaldor facts?

Answer 2

• per capita output grows at a constant rate
• capital-output ratio is roughly constant
• real rate of return to capital is roughly constant
• shares of capital and labour on national income are roughly constant

The facts are true over a long period of time

Question 3

What do the Kuznets facts tells us?

Answer 3

• output and employment share in the agriculture sector declined as GDP/income per capita increases
• output and employment share in the industry sector increased but after certain point declined as GDP/income per capita increases
• output and employment share in the services sector increased as GDP/income per capita increases

Question 4

What are the two approaches to structural transformation?

Answer 4

• Demand approach
• Productivity approach

Question 5

What is demand approach based on?

Answer 5

Assumption of non-homothetic preferences

Question 6

What are homothetic preferences?

Answer 6

Preferences are defined as homothetic of the ratios of goods demanded by consumers depend only on relative prices, not income

Question 7

What do homothetic utility functions yield?

Answer 7

• income elasticities of demand = 1

Question 8

What is the productivity approach based on?

Answer 8

• the assumption that the growth rates of technology between the sectors are different

Question 9

Rank the technology growth rates of the sectors with the fastest growing first?

Answer 9

• agriculture
• manufacturing
• services

Question 10

Describe the nature of preferences under the productivity approach?

Answer 10

• preferences are homothetic
• when we have a difference in productivity growth rates we do not need non-homothetic preferences to generate structural transformation