It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output.
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It has been developed by John C. H Fei and Gustav Ranis. It can be understood as an extension of the Lewis model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector.
Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
At the same time, growth in the agricultural sector must not be negligible and its output should be sufficient to support the whole economy with food and raw materials. Fei-Ranis economic model can be classified as a classical model, as it uses the classical assumption of subsistence wages. Also, the marginal product of labor is zero. This phase is similar to the Lewis model. In Phase 2 of the model, the agricultural sector sees a rise in productivity and this leads to increased industrial growth such that a base for the next phase is prepared.
In Phase 2, agricultural surplus may exist as the increasing average product AP , higher than the marginal product MP and not equal to the subsistence level of wages. Hence, it represents surplus labor. This fall in AP can be attributed to the fact that as agricultural laborers shift to the industrial sector, the real wage of industrial laborers decreases due to shortage of food supply, since less laborers are now working in the food sector.
The decrease in the real wage level decreases the level of profits, and the Depiction of Phase1, Phase2 and Phase3 of the dual economy model using average output. This re-investment of surplus can be graphically visualized as the shifting of MP curve outwards. In Phase2 the level of disguised unemployment is given by AK. This is the point where the economy becomes completely commercialized in the absence of disguised unemployment.
The supply curve of labor in Phase 3 is steeper and both the sectors start bidding equally for labor. The growth of surplus generated within the agricultural sector, and the growth of industrial capital stock dependent on the growth of industrial profits; 2. Growth rate of population. So, the three fundamental ideas used in this model are: 1. Agricultural growth and industrial growth are both equally important; 2. Agricultural growth and industrial growth are balanced; 3.
However, the cost of shifting labor in terms of both private and social cost may be high, for example transportation cost or the cost of carrying out construction of buildings. In addition to that, per capita agricultural consumption can increase, or there can exist a wide gap between the wages of the urban and the rural people.
These three occurrences- high cost, high consumption and high gap in wages, are called as leakages, and leakages prevent the creation of agricultural surplus. In fact, surplus generation might be prevented due to a backward-sloping supply curve of labor as well, which happens when high income-levels are not consumed. This would mean that the productivity of laborers with rise in income will not rise.
However, the case of backward- Connectivity between sectors Fei and Ranis emphasized strongly on the industry-agriculture interdependency and said that a robust connectivity between the two would encourage and speedup development. If agricultural laborers look for industrial employment, and industrialists employ more workers by use of larger capital good stock and labor-intensive technology, this connectivity can work between the industrial and agricultural sector.
Also, if the surplus owner invests in that section of industrial sector that is close to soil and is in known surroundings, he will most probably choose that productivity out of which future savings can be channelized. According to them, economic progress is achieved in dualistic economies of underdeveloped countries through the work of a small number of entrepreneurs who have access to land and decision-making powers and use industrial capital and Agriculture Sector In A , land is measured on the Land Labor production function vertical axis, and labor on the horizontal axis.
Ou and Ov represent two ridge lines, and the production contour lines are depicted by M, M1 and M2. The area enclosed by the ridge lines defines the region of factor substitutability, or the region where factors can easily be substituted.
Let us understand the impact of this. If te amount of labor is the total labor in the agricultural sector, the intersection of the ridge line Ov with the production curve M1 at point s renders M1 perfectly horizontal below Ov. The horizontal behavior of the If Ot is the total land in the Land Labor production function agricultural sector, ts amount of labor can be employed without it becoming redundant, and es represents the redundant agricultural labor force.
This led Fei and Ranis to develop the concept of Labor Utilization Ratio, which they define as the units of labor that can be productively employed without redundancy per unit of land.
Fei and Ranis also built the Land Labor production function concept of endowment ratio, which is a measure of the relative availability of the two factors of production. The actual point of endowment is given by E. The curve increases at a decreasing rate, as more units of labor are added to a fixed amount of land. At point N, the curve shapes horizontally and this point N conforms to the point G in C, which shows Industrial Sector Like in the agricultural sector, Fei Capital-Labor Production Function and Ranis assume constant returns to scale in the industrial sector.
However, the main factors of production are capital and labor. In the graph A right hand side, the production functions have been plotted taking labor on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAoA1A2. As capital increases from Ko to K1 to K2 and labor increases from Lo to L1 and L2, the industrial output represented by the production contour Ao, A1 and A3 increases accordingly.
Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P2, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.
MPPL curves corresponding to their respective c Recommended.
Fei-Ranis Model of Economic Growth
Agricultural surplus[ edit ] Agricultural surplus in general terms can be understood as the produce from agriculture which exceeds the needs of the society for which it is being produced, and may be exported or stored for future use. Generation of agricultural surplus[ edit ] Agricultural surplus in the dual economy of Fei and Ranis To understand the formation of agricultural surplus, we must refer to graph B of the agricultural sector. The figure on the left is a reproduced version of a section of the previous graph, with certain additions to better explain the concept of agricultural surplus. We first derive the average physical productivity of the total agricultural labor force APPL. Fei and Ranis hypothesize that it is equal to the real wage and this hypothesis is known as the constant institutional wage hypothesis. It is also equal in value to the ratio of total agricultural output to the total agricultural population. Observe point Y, somewhere to the left of P on the graph.
fei-ranis model of economic growth
It has been developed by John C. H Fei and Gustav Ranis. It can be understood as an extension of the Lewis model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account.