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Classic Theories of Economic Development
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Classic Theories of Economic Development

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Questions and Answers

What characterizes the traditional agricultural sector in the Lewis two-sector model?

  • Constant urban wage rates
  • High capital accumulation
  • Zero marginal labor productivity (correct)
  • High productivity and surplus labor

    • What is the primary focus of the Lewis two-sector model?

  • Reduction of labor supply in the urban sector
  • Technological advancements in agriculture
  • Labor transfer and growth in the modern sector (correct)
  • Increasing subsistence production levels

    • What determines the speed of expansion in the modern sector according to the Lewis model?

  • Capital accumulation and industrial investment (correct)
  • Rate of technological change
  • Changes in urban wage rates
  • Changes in consumer demand

    • In the Lewis model, what is assumed about the wages in the urban industrial sector?

    <p>They are constant and above subsistence levels</p> Signup and view all the answers

    What is implied by the term 'surplus labor' in the Lewis model?

    <p>Labor that can be removed without impacting output</p> Signup and view all the answers

    How is the average product of labor derived in the Lewis model?

    <p>From the total output curve of food production</p> Signup and view all the answers

    Which statement is NOT true regarding the modern sector in the Lewis model?

    <p>It relies solely on foreign investment</p> Signup and view all the answers

    What distinguishes the Lewis two-sector model from other models of economic development?

    <p>Analysis of labor transfer from a subsistence sector</p> Signup and view all the answers

    What does Lewis assume about the rural labor supply curve to the modern sector?

    <p>It is perfectly elastic at constant wage levels</p> Signup and view all the answers

    What characterizes the marginal product of labor in the rural sector according to the Lewis model?

    <p>It is zero.</p> Signup and view all the answers

    How is the rural real wage determined in the context of the Lewis model?

    <p>By the average product of labor.</p> Signup and view all the answers

    What happens to the total product curve when the capital stock in the modern sector increases?

    <p>It shifts upward.</p> Signup and view all the answers

    What does the Lewis turning point signify in the labor market?

    <p>The point at which rural labor becomes scarce.</p> Signup and view all the answers

    What is assumed about the reinvestment of profits in the modern sector within the Lewis model?

    <p>It stimulates the growth of the capital stock.</p> Signup and view all the answers

    How does the labor supply curve behave in the modern sector as employment and wages increase?

    <p>It becomes positively sloped.</p> Signup and view all the answers

    What relationship does the Lewis model assume between capital accumulation and job creation in the modern sector?

    <p>They are directly proportional.</p> Signup and view all the answers

    What does the term 'anti-developmental' economic growth refer to?

    <p>Economic growth where income and output benefits are concentrated among a few capital owners</p> Signup and view all the answers

    Which of the following is a criticism of the Lewis two-sector model regarding rural labor?

    <p>It assumes there is a large surplus of labor in rural areas.</p> Signup and view all the answers

    What implication does having an elastic supply of rural labor have for urban employers in the Lewis model?

    <p>Employers can hire as many rural workers as needed without wage increases.</p> Signup and view all the answers

    What is a critical assumption that can limit the applicability of the Lewis model to contemporary developing countries?

    <p>The assumption that labor transfer is linked only to capital accumulation.</p> Signup and view all the answers

    What institutional factors challenge the notion of a competitive labor market in urban areas according to the criticisms of the Lewis model?

    <p>Union bargaining power and multinational corporation practices</p> Signup and view all the answers

    What does the demand curve for labor in the modern sector reflect within the Lewis model?

    <p>The declining marginal product of labor.</p> Signup and view all the answers

    What assumption made by the Lewis two-sector model regarding wages in urban labor markets has been challenged?

    <p>Wages in urban areas remain constant when surplus rural labor exists.</p> Signup and view all the answers

    What evidence contradicts the assumption of diminishing returns in the modern industrial sector?

    <p>Evidence of increasing returns in the modern industrial sector</p> Signup and view all the answers

    Why is the Lewis model still studied today?

    <p>It explains the transition of labor from agriculture to manufacturing in specific countries.</p> Signup and view all the answers

    What is identified as the 'Lewis turning point'?

    <p>The point at which manufacturing wages begin to rise</p> Signup and view all the answers

    What is a common misconception about wage determination in urban labor markets?

    <p>Wages are determined solely by supply and demand.</p> Signup and view all the answers

    What dominant view did theorists of the 1950s and 1960s hold regarding economic development?

    <p>All countries must pass through successive stages of growth.</p> Signup and view all the answers

    Which theory emerged in the 1970s focusing on internal processes for sustained growth?

    <p>Theories and patterns of structural change</p> Signup and view all the answers

    The international-dependence revolution emphasized which of the following?

    <p>The importance of political and power relationships in development.</p> Signup and view all the answers

    What was a key tenet of the neoclassical counterrevolution?

    <p>Free markets and open economies contribute positively to growth.</p> Signup and view all the answers

    Dependence theorists focused on which of the following aspects?

    <p>The internal constraints on economic development.</p> Signup and view all the answers

    According to the linear-stages-of-growth model, development is synonymous with:

    <p>Rapid, aggregate economic growth.</p> Signup and view all the answers

    What was a major criticism of the linear-stages-of-growth model?

    <p>It does not account for internal structural changes.</p> Signup and view all the answers

    The eclectic approach to economic development today emphasizes:

    <p>Integrating insights from multiple economic perspectives.</p> Signup and view all the answers

    Which of the following was NOT a focus of dependence theorists?

    <p>Free market operations.</p> Signup and view all the answers

    Walt Rostow is most associated with which model of economic development?

    <p>Linear-stages-of-growth model.</p> Signup and view all the answers

    What is the first stage that a country must pass through according to Rostow's stages of growth?

    <p>Traditional society</p> Signup and view all the answers

    In the Harrod-Domar growth model, what is directly related to the growth rate of national income?

    <p>Level of savings</p> Signup and view all the answers

    Which of the following best describes the capital-output ratio in the Harrod-Domar model?

    <p>It defines the amount of capital necessary to produce a specific amount of GDP.</p> Signup and view all the answers

    What two components does the Harrod-Domar model say contribute to economic growth?

    <p>Labor force growth and technological progress</p> Signup and view all the answers

    How does an increase in the savings ratio affect GDP growth according to the Harrod-Domar model?

    <p>It directly increases the growth rate of GDP.</p> Signup and view all the answers

    What is an assumption made about labor in the Harrod-Domar growth model?

    <p>Labor availability is assumed to be abundant.</p> Signup and view all the answers

    What happens to GDP growth if the capital-output ratio increases?

    <p>GDP growth declines.</p> Signup and view all the answers

    According to Rostow, a necessary strategy for economic takeoff is to mobilize what type of savings?

    <p>Domestic and foreign savings</p> Signup and view all the answers

    What is the relationship between new investment and GDP growth in the Harrod-Domar model?

    <p>New investments lead to corresponding increases in GDP.</p> Signup and view all the answers

    What is one factor that can change the capital-output ratio over time?

    <p>The functioning of financial markets</p> Signup and view all the answers

    Study Notes

    Classic Theories of Economic Development

    • Four Major Theories of Economic Development have dominated post-World War II literature:
      • Linear-stages-of-growth model: Countries advance through stages to achieve self-sustaining growth. (Rostow's Stages of Growth)
      • Theories and patterns of structural change: Analyze internal change for sustained economic growth. (eg. Harrod-Domar Growth Model)
      • International-dependence revolution: Examines power relationships and institutional rigidities in global development.
      • Neoclassical, free-market counterrevolution: Promotes free markets, open economies, and privatization for development.

    Rostow's Stages of Growth

    • Walter Rostow proposed that countries pass through stages to achieve development:
      • Traditional Society: Pre-industrial, dominated by agriculture.
      • Preconditions for Takeoff: Development of infrastructure, like transportation and education.
      • Takeoff: Rapid industrial growth and investment.
      • Drive to Maturity: Technological advancements and diversification.
      • Age of High Mass Consumption: Focus on consumer goods and services.

    Harrod-Domar Growth Model

    • Focuses on the relationship between savings, investment, and economic growth.
    • Capital-output ratio (c): Amount of capital required to produce one unit of output.
    • Savings ratio (s): Proportion of national income saved.
    • The model states that economic growth is directly proportional to the savings ratio and inversely proportional to the capital-output ratio.
    • Growth Rate = (s / c) * 100%
    • The Harrod-Domar Model emphasizes the crucial role of investment in driving economic growth.

    Lewis Two-Sector Model

    • Developed by W. Arthur Lewis, this model explains the transition from a traditional, agricultural economy to a modern, industrial one.
    • Two Sectors:
      • Traditional sector: Overpopulated and characterized by zero marginal labor productivity.
      • Modern sector: High-productivity, urban, industrial sector.
    • Labor Transfer:
      • Surplus labor from the traditional sector shifts to the modern sector, driven by higher wages and output expansion.
    • Capital Accumulation:
      • Profits generated in the modern sector are reinvested, leading to further growth and job creation.
    • The model assumes a constant wage in the urban industrial sector, determined by a premium over the subsistence level of wages in the agricultural sector.
    • Lewis's model also assumes that the supply curve of rural labor is perfectly elastic, meaning that the modern sector can hire as many workers as it needs without increasing wages.
    • The process continues until all surplus labor is absorbed into the modern sector, marking a turning point where wages in the modern sector start to rise.

    Criticisms of the Lewis Two-Sector Model

    • The model's key assumptions have been contested:
      • Surplus Labor: The assumption of surplus labor in rural areas is not always valid.
      • Constant Wages: Wages in the modern sector may rise due to factors like union bargaining power or multinational hiring practices.
      • Diminishing Returns: Increasing returns may prevail in the modern sector, contradicting the model's assumption.
      • Labor-Saving Technology: Investment in sophisticated technology can reduce labor demand, limiting employment growth.

    What Next: Lewis Two-Sector Model

    • The model provides insights into labor migration in China and other countries with similar growth patterns.
    • The model highlights the potential drawbacks of labor-saving technologies and the need for policies that promote inclusive growth.

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    Description

    Explore the four major theories that have shaped economic development since World War II. From Rostow's stages of growth to the neoclassical counterrevolution, this quiz covers critical concepts and frameworks essential for understanding economic progress. Test your knowledge of historical and contemporary economic theories.

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