Economics(Paper-4) - Shivaji University
Economics(Paper-4) - Shivaji University Economics(Paper-4) - Shivaji University
iii) Relationship between the two sectors : When the capitalist sector expands, it draws labour from the subsistence sector. As a result, output per head of labours that move from the subsistence sector to the capitalist sector increases. In this situation new industries can be created, or old industries expanded at the existence wage rate. That results more unskilled labour move from subsistence sector to capitalist sector.The migration will be continued till the wages offered by subsistence sector. Labour will not leave the family from to seek employment elsewhere if the wage that is offered to them is less than their marginal productivity. In fact wages offered by the capitalist sector will have to be somewhat higher than subsistence wages in order to compensate labour for the cost of transfer and to induce labour to leave the traditional way of life of the subsistence sector.According to Lewis, there is usually a gap of 30 per cent or more between capitalist wages and subsistence earnings. N 3 W age and Marginal Product N 2 N 1 W S P1 P2 P3 Q 1 Q 2 Q 3 W S 0 M 1 M 2 M 3 X In the above diagram, OX axis shows that quantity of labour and OY axis shows that marginal productivity of labour and wages offered to the labour. SS curve presents wages offered in subsistence sector and WW curve indicates wages offered in capitalist sector. WW is the perfectly elastic supply of labour. Given a fixed amount of capital at the outset, the demand for labour is initially represented by the marginal productivity schedule for labour N 1 Q 1 . If OW is the current wage, the amount of labour employed in the capitalist sector is OM 1 . Beyond the point M 1 , workers earn whatever they can in the subsistence sector. The total product in this case is ON 1 P 1 M 1 of which the share of wages is OWP 1 M 1 and capitalists’ surplus or profits is N 1 WP 1 . 123456789012345678901234567890121234567 123456789012345678901234567890121234567 Quantity of Labour 20 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567
B The Process of Economic Expansion : Lewis emphasizes on the reinvestment of capitalists’ surplus for creation new capital. Therefore the amount of fixed capital increases and the schedule of the marginal productivity of labour rises to the level of N 2 Q 2 . The total product rises to ON 2 P 2 M 2 . As a result, the share of wages increases to OWP 2 M 2 and capitalists’ surplus or profit also rises to WN 2 P 2 . An increased part is again reinvested leading to a further rise in total product. At each stage, capitalists’ surplus and the level of employment in the capitalist sector increases from OM 1 to OM 2 , OM 3 etc. as labour withdraws from the subsistence sector into Capitalist Sector, there is larger investment of profits and the process continues as long as there is surplus labour exhausted from the subsistance sector. B The Role of Savings: The role of savings in the process of growth is crucial and important. In this model capitalists surplus do not reinvest, neither will the total product expand nor will opportunities for employment increase. Therefore, unless savings increase, economic growth cannot take place. Lewis argues that because of extreme inequalities of income and wealth in underdeveloped countries, the capacity to save is limited to about 10 per cent of the richest people. If the saving of richest people increases the process of growth expands, the poor and middle class people does not save, because of their capacity to save is low. The reason of low saving in underdeveloped country because their capitalist sector is small. Also there exist unequal distribution of income and wealth. If these countries had a larger capitalist sector, profits would be a greater part of their national income, and savings and investment would also be greater. B Role of Bank Credit: Lewis admits the possibility that capital creation is also possible as a result of a net increase in the supply of money especially bank credit. Bank credit is important for development of underdeveloped countries which have idle resources and surplus labour supply. In underdeveloped countries, the effect of bank credit on capital formation is similar to that of reinvestment in profits. Bank credit helps in the expansion of employment, output, effective demand and purchasing power of the community. B End of Growth Process: Lewis model shows that if unlimited labour is available at constant real wage, the capitalist surplus will rise continuously and annual investment will be a rising proportion of national income. But this process of economic growth cannot go for ever. It comes to an end when there is no surplus labour.According to Lewis, the growth process comes to an end due to following reasons. i. The capitalist sector expands so rapidly that it reduces absolutely the population 123456789012345678901234567890121234567 123456789012345678901234567890121234567 21 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567 123456789012345678901234567890121234567
- Page 1 and 2: B. A. Part-III : Economics Paper 4
- Page 3 and 4: 7) “ Economic development is a pr
- Page 5 and 6: underdeveloped countries in compari
- Page 7 and 8: developing states through the progr
- Page 9 and 10: 7) Goals : objectives. 8) Disguised
- Page 11 and 12: UNIT - 2 Theories of Economic Growt
- Page 13 and 14: structure of the traditional societ
- Page 15 and 16: help of example, “If we take marg
- Page 17 and 18: promote and enhance social welfare.
- Page 19: B The Closed Economy : Assumptions
- Page 23 and 24: consider the possibility of the cap
- Page 25 and 26: gap between income and expenditure
- Page 27 and 28: disequalising force is trade, which
- Page 29 and 30: 8. Rostow developed his theory in
- Page 31 and 32: UNIT - 3 Domestic Measures for Econ
- Page 33 and 34: all kinds. Hence, capital formation
- Page 35 and 36: policy. But these trio are and may
- Page 37 and 38: 1) Provision of food to evergrowing
- Page 39 and 40: the country.The central bank contro
- Page 41 and 42: 7) Public Spending : Fiscal policy
- Page 43 and 44: 3.3 Conclusion / Summary : Capital
- Page 45 and 46: UNIT - 4 International Measures for
- Page 47 and 48: Y P S C Import E D P O X1 X2 B X Ex
- Page 49 and 50: for the developing countries has al
- Page 51 and 52: they are entitled to get dividend a
- Page 53 and 54: 4) Infrastructure : Since last thre
- Page 55 and 56: III) Advantages of Multi-national C
- Page 57 and 58: oundaries of nation states. 2) Mean
- Page 59 and 60: 4.3 Summary : 1) Role of Foreign Tr
iii) Relationship between the two sectors :<br />
When the capitalist sector expands, it draws labour from the subsistence sector.<br />
As a result, output per head of labours that move from the subsistence sector to the<br />
capitalist sector increases. In this situation new industries can be created, or old<br />
industries expanded at the existence wage rate. That results more unskilled labour<br />
move from subsistence sector to capitalist sector.The migration will be continued till<br />
the wages offered by subsistence sector. Labour will not leave the family from to seek<br />
employment elsewhere if the wage that is offered to them is less than their marginal<br />
productivity. In fact wages offered by the capitalist sector will have to be somewhat<br />
higher than subsistence wages in order to compensate labour for the cost of transfer<br />
and to induce labour to leave the traditional way of life of the subsistence sector.According<br />
to Lewis, there is usually a gap of 30 per cent or more between capitalist wages and<br />
subsistence earnings.<br />
N 3<br />
W age and Marginal Product<br />
N 2<br />
N 1<br />
W<br />
S<br />
P1 P2 P3<br />
Q 1 Q 2 Q 3<br />
W<br />
S<br />
0 M 1 M 2 M 3 X<br />
In the above diagram, OX axis shows that quantity of labour and OY axis shows<br />
that marginal productivity of labour and wages offered to the labour. SS curve presents<br />
wages offered in subsistence sector and WW curve indicates wages offered in capitalist<br />
sector. WW is the perfectly elastic supply of labour. Given a fixed amount of capital at<br />
the outset, the demand for labour is initially represented by the marginal productivity<br />
schedule for labour N 1<br />
Q 1<br />
. If OW is the current wage, the amount of labour employed in<br />
the capitalist sector is OM 1<br />
. Beyond the point M 1<br />
, workers earn whatever they can in the<br />
subsistence sector. The total product in this case is ON 1<br />
P 1<br />
M 1<br />
of which the share of<br />
wages is OWP 1<br />
M 1<br />
and capitalists’ surplus or profits is N 1<br />
WP 1<br />
.<br />
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Quantity of Labour<br />
20<br />
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