economic transformation and growth dr. george norton agricultural and applied economics virginia...
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Economic Transformation Economic Transformation and Growthand Growth
Dr. George NortonAgricultural and
Applied EconomicsVirginia Tech
Copyright 2006
Objectives Objectives
Discuss economic transformation Discuss economic transformation that occurs with developmentthat occurs with development
Review production economics Review production economics conceptsconcepts
Identify potential sources of Identify potential sources of economic growtheconomic growth
Economic TransformationEconomic Transformation
Increase in the size of the non-agricultural Increase in the size of the non-agricultural sector (income and employment) sector (income and employment) relativerelative to agricultureto agriculture
What are the Causes?What are the Causes?1.1. Increased agricultural productivityIncreased agricultural productivity2.2. People spend more of their income on People spend more of their income on
non-food items as development proceeds non-food items as development proceeds (income elasticity of demand for food (income elasticity of demand for food declines)declines)
3.3. Specialization in agriculture (produce Specialization in agriculture (produce less non-ag goods on the farm) and in less non-ag goods on the farm) and in the industrial sector itselfthe industrial sector itself
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0 4000 8000 12000 16000 20000 24000 28000 32000 36000 40000
GNP per capita
Agr
icut
ural
as
a sh
are
of G
DP
Agriculture’s share of national Agriculture’s share of national income versus national incomeincome versus national income
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30
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0 5000 10000 15000 20000 25000 30000 35000 40000 45000
GNI Per Capita (US$ 2002)
Ag
ricu
ltu
re's
Sh
are
of
To
tal
Em
plo
ymen
t (P
erce
nta
ge
2002
)Agriculture’s share of employment Agriculture’s share of employment
versus national incomeversus national income
Factors influencing the Factors influencing the speedspeed of economic transformationof economic transformation
Rate of growth of the Rate of growth of the total labor forcetotal labor force
Rate of growth in non-Rate of growth in non-farm jobsfarm jobs
Proportion of labor Proportion of labor force initially in force initially in agricultureagriculture
What happens to the number and What happens to the number and size of farms? (U.S. example)size of farms? (U.S. example)
ImplicationsImplications
ET means ET means shareshare of agriculture falls of agriculture falls
NumberNumber of farmers of farmers rises and then rises and then fallsfalls• Initial rise in number of farmers against a Initial rise in number of farmers against a
fixed land base means a rise in poverty until fixed land base means a rise in poverty until productivity increases occur in agricultureproductivity increases occur in agriculture
• Initial rise in # of farmers means Initial rise in # of farmers means environmental pressures environmental pressures
• Technologies needed during rising and falling Technologies needed during rising and falling stages may differstages may differ
Implications for AgricultureImplications for Agriculture
E.T. affects the size of the E.T. affects the size of the agricultural labor force, farm size, agricultural labor force, farm size, and per capita income in agricultureand per capita income in agriculture
E.T. depends on growth in food E.T. depends on growth in food productionproduction
Labor will bear some adjustment Labor will bear some adjustment costscosts
Important Production Important Production Economics ConceptsEconomics Concepts
Production functionProduction function
Marginal productMarginal product
Law of diminishing returnsLaw of diminishing returns
IsoquantIsoquant
Typical Production FunctionTypical Production Function
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CA
B
L1
L2
C1 C2Quantity of capital
Qu
anti
tu o
f la
bo
r
0
Typical Isoquant StructureTypical Isoquant Structure
K J0
Units of input (x)
Un
its
of
ou
tpu
t (Y
)
Marginal product
Marginal Product CurveMarginal Product Curve
What is the law of diminishing What is the law of diminishing returns?returns?
Why is the law of diminishing Why is the law of diminishing returns important?returns important?
Major Sources of Economic Major Sources of Economic GrowthGrowth
Population growthPopulation growth
Increased utilization of natural resourcesIncreased utilization of natural resources
Capital accumulationCapital accumulation
Increases in scale or specializationIncreases in scale or specialization
Increases in efficiencyIncreases in efficiency
Technological progress Technological progress
Human capital and institutionsHuman capital and institutions
PopulationPopulation
Natural ResourcesNatural Resources
Capital AccumulationCapital Accumulation
Increase in human-made Increase in human-made physicalphysical items such as buildings, machinery, items such as buildings, machinery, tools, etc.tools, etc.
Increase in Increase in humanhuman capital such as capital such as educated population educated population
Where does it come from? Savings and Where does it come from? Savings and investmentinvestment
What is efficiency What is efficiency improvement?improvement?
Getting more for the same Getting more for the same inputs by allocating them in a inputs by allocating them in a
better waybetter way
What are the three types of What are the three types of efficiency?efficiency?
TechnicalTechnical
Allocative (MR = MC)Allocative (MR = MC)
MarketMarket
Qty. of output(e.g. rice)
K0 J
Output at each level of input use
Qty. of input (e.g. labor)
*
*
Technically efficient point
Technically inefficient
Technical EfficiencyTechnical Efficiency
Qty. of input #2(e.g. machinery)
Qty. of output(e.g. rice)
Qty. of input (e.g. labor)
Qty. of input #1(e.g. labor)
Highest-profit point along the production function
line whose slope is P(labor)/P(rice)
line of slope - P(machines)/P(labor)
Lowest-cost point along the isoquant
Allocative (Price) EfficiencyAllocative (Price) Efficiency
Market efficiencyMarket efficiency
Refers to the type of economic Refers to the type of economic system and degree of market powersystem and degree of market power• A relatively free market with many A relatively free market with many
buyers and sellers tends to have greater buyers and sellers tends to have greater market efficiency as no one or small market efficiency as no one or small number of buyers and sellers can number of buyers and sellers can control the prices. control the prices.
Examples of new technologiesExamples of new technologies
Higher yielding plant Higher yielding plant varietiesvarieties
Improved methods of pest Improved methods of pest controlcontrol
More efficient thresherMore efficient thresher
Improved livestock feeding Improved livestock feeding systemsystem
Technological ProgressTechnological Progress
Output
Input
Technological ProgressTechnological Progress
Price
Quantity
D S1
S2
Scale or specializationScale or specialization
Can raise productivity and facilitate Can raise productivity and facilitate trade trade
Division of labor and specialization Division of labor and specialization can make workers more efficientcan make workers more efficient• Even more important in industry than Even more important in industry than
agriculture, but also important for agriculture, but also important for agricultureagriculture
Human Capital and Social Human Capital and Social InstitutionsInstitutions
Human capital: education, improved Human capital: education, improved healthhealth
Institutions: Rules of the gameInstitutions: Rules of the game
Examples: laws, grades and Examples: laws, grades and standards, social organizations standards, social organizations
ConclusionsConclusions
Economic transformation is Economic transformation is inevitable as development occurs inevitable as development occurs
Several major sources of economic Several major sources of economic growth with their relative importance growth with their relative importance having changed over timehaving changed over time
Both technological and institutional Both technological and institutional change are vitally important; without change are vitally important; without institutions to provide incentives institutions to provide incentives there will be little growth there will be little growth