TOPIC 6: Lewis Two-Sector Model

Flashcards covering key vocabulary and concepts from the Lewis Two-Sector Model and structural change models.

Structural Change Models

Economic models that seek to understand the determinants and effects of a country's economic activity composition and its response to external changes.

Sectors

Groupings of economic actors performing similar functions within an economy, such as agricultural, industrial, export, service, or high-tech.

Lewis Two-Sector Model

An early formal structural change model, developed by W. Arthur Lewis, which illustrates how labor migration is related to capital deepening and highlights the role of structural change in development.

W. Arthur Lewis

A Nobel Laureate who developed the Lewis Two-Sector Model in the mid-1950s, emphasizing labor migration and capital deepening.

Urban/Manufacturing Sector (Lewis Model)

One of the two sectors in the Lewis model, where firms engage in production using capital, typically located in urban areas with a competitive labor market.

Rural/Agricultural Sector (Lewis Model)

One of the two sectors in the Lewis model, characterized by agricultural production, a fixed capital level, and a large surplus of labor with zero marginal product.

Closed Economy (Lewis Model Assumption)

An assumption in the Lewis model where there is no international trade, all goods are bought and sold domestically, and there are no foreign sources of investment.

Labor Augmenting Capital

A characteristic in the Lewis model where increasing the capital stock increases the marginal product of labor, leading to higher competitive wage rates and overall production.

Surplus Labor (Lewis Model)

A condition in the rural/agricultural sector where the marginal product of labor is zero; adding or subtracting workers does not change total output.

Agricultural Sector Wages (Lewis Model)

Wages in the rural/agricultural sector are set to the average product of labor, given the assumption of surplus labor and zero marginal product.

Migration Stage (Lewis Model)

The stage where labor moves from the agricultural to the manufacturing sector, driven by higher wages in manufacturing, until urban marginal product of labor equals rural average wage.

Production/Investment Stage (Lewis Model)

The stage where increased labor in the urban sector leads to higher output, which is reinvested into capital, increasing capital stock, marginal product of labor, and urban wages.

Self-Sustaining Growth

Economic growth that continues over the long run, driven by internal savings, investment, and complementary private and public activities.

Declining Marginal Product of Capital

A factor in the Lewis model suggesting that capital increases output and the marginal product of labor by successively smaller amounts.

Lewis Turning Point

The point in the Lewis model when surplus labor in the agricultural sector is depleted, leading to increased agricultural wages due to competition for labor between sectors.

Limitations of Lewis Model (Agricultural Sector)

Critiques that the model's assumptions of a general surplus of labor, lack of a rural labor market, and zero marginal product of capital in agriculture are often inaccurate.

Labor Saving Capital Investments

An alternative to labor-augmenting capital, where investments reduce the need for labor, potentially shifting wealth towards capital owners rather than workers.

Urban Unemployment (Lewis Model Limitation)

A significant limitation of the Lewis model, as it does not account for the phenomenon of people migrating to urban areas despite no guarantee of employment.

Modern Structural Change Models

Contemporary models that build on the sectoral approach of the Lewis model but incorporate a broader range of domestic and international factors, acknowledging country-specific idiosyncrasies.