Ranis and Fei Model

Question 1

in the traditional agri sector there is:

Answer 1

• disguised unemployment
• core of surplus labour
• wage rate given by income sharing

Question 2

industrial sector is…

Answer 2

capitalistic

Question 3

describe the lewis, rani and fei model

Answer 3

• capital accumulation in industrial sector is engine of growth
• more capital means greater demand for labour which induces greater rural-urban migration
• development proceeds so terms of trade turn against industry
• food prices rise which causes increase in industrial wage rate
• pace of development driven by accumulation of capital but limited by ability of economy to produce surplus of food

Question 4

explain each panel of lewis-ranis-fei model

Answer 4

bottom panel
- flipped round production function as we are interested in industrial labour

middle panel
- we see output starting to fall
- agricultural surplus is starting to decline so decline in available labour to move to industrial sector
- significant increase in wages

top panel
- w* is wage rate
- wage rate increased as agricultural output decreases but there is more demand and an increased price of output
- means industries must pay workers more to compensate for higher prices

Question 5

how to calculate wage rate

Answer 5

surplus * terms of trade (TOT)

Question 6

phase 1 of lewis-ranis-fei model

Answer 6

surplus labour in agricultural sector so it can move to industrial sector with no impact on output
- A-B is the surplus labour
- individuals adding nothing to production
- extra labour just producing a surplus which is calculated by average income

Question 7

how to calculate average income

Answer 7

production function/number of people

Question 8

phase 2 of lewis-ranis-fei model

Answer 8

disguised unemployment where MP < wage rate
- not economically efficient
- B-C can move this labour as it is not efficiently allocated so should be employed somewhere else
- output starting to fall

Question 9

phase 3 of lewis-ranis-fei model

Answer 9

point c is economically efficient
- leads to commercialisation of agriculture
- can’t take more labour from agriculture as won’t be most efficient allocation of labour

Question 10

2 turning points of lewis-ranis-fei model

Answer 10

at point B
- removed all surplus labour
- agricultural output starts to decline and wages increase

at point C
- commercialisation of agriculture
- end up in competition with each other

Question 11

how does lewis-ranis-fei model work
- from A-B

Answer 11

focus on top panel of model

industry is absorbing all labour which shows up
- at beginning, point x, industry demand x amount of labour form agricultural sector
- wage is w*
- industry makes more profit, reinvests, needs more labour, increasing demand for labour so moves to higher demand curve
- now at point y, still in surplus labour
- agricultural output and surplus stays the same so there is no increase in wages and they can employ more people
- industry reinvests again so moves to higher demand curve

Question 12

how does lewis-ranis-fei model work
- from B-C

Answer 12

now in the disguised unemployment phase
- output is decreasing so wage has to compensate for increased for price
- now at point z where demand is slightly lower than if we were still in agricultural surplus where we would be at z’
- industry wants z’ but due to TOT changes, wage rates increase so can only employ z

Question 13

how does lewis-ranis-fei model work
- after c

Answer 13

agricultural and industrial sectors in competition for labour
- wage in agricultural sector now increases to try and attract people to stay in sector or come back to sector