Lewis Dual Sector model

Question 1

What are the assumptions in the Lewis dual sector model?

Answer 1

2 sectors; modern and traditional
Unlimited supply of labour at a fixed wage rate in the traditional sector
Accumulation of capital occurs only in the modern sector
Capitalists save all profits and reinvest it
Workers do not save
No depreciation
Constant returns to scale in the modern sector

Question 2

In the traditional sector with income sharing, the income going to each member is equal to the ______

Answer 2

Average product of labour

Question 3

What does the Euler’s theorem state?

Answer 3

Given CRS the value of output is equal to the sum of the returns to the 2 factors K and L

Question 4

What are the implications of the Lewis dual sector model?

Answer 4

Growth of the economy is directly related to the growth of the modern sector.
Inequality rises in the early stages of development

Question 5

What are some criticisms of the Lewis dual sector model?

Answer 5

Assumes all absorbed labour are fully employed by the modern sector
Model ignores depreciation, int trade and population growth
Transfer of unskilled workers from T to M is considered as almost smooth and costless
Profits are assumed to be invested in an identical technology