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Economic Economic Transformation and Transformation and Growth Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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Page 1: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Economic Transformation Economic Transformation and Growthand Growth

Dr. George NortonAgricultural and

Applied EconomicsVirginia Tech

Copyright 2006

Page 2: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia 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

Page 3: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 4: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

0

10

20

30

40

50

60

70

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

Page 5: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

0

10

20

30

40

50

60

70

80

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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

Page 6: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 7: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

What happens to the number and What happens to the number and size of farms? (U.S. example)size of farms? (U.S. example)

Page 8: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 9: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 10: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Important Production Important Production Economics ConceptsEconomics Concepts

Production functionProduction function

Marginal productMarginal product

Law of diminishing returnsLaw of diminishing returns

IsoquantIsoquant

Page 11: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Typical Production FunctionTypical Production Function

Page 12: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

200

150

100

50

CA

B

L1

L2

C1 C2Quantity of capital

Qu

anti

tu o

f la

bo

r

0

Typical Isoquant StructureTypical Isoquant Structure

Page 13: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

K J0

Units of input (x)

Un

its

of

ou

tpu

t (Y

)

Marginal product

Marginal Product CurveMarginal Product Curve

Page 14: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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?

Page 15: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 16: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

PopulationPopulation

Page 17: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Natural ResourcesNatural Resources

Page 18: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 19: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 20: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

What are the three types of What are the three types of efficiency?efficiency?

TechnicalTechnical

Allocative (MR = MC)Allocative (MR = MC)

MarketMarket

Page 21: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 22: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 23: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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.

Page 24: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 25: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Technological ProgressTechnological Progress

Output

Input

Page 26: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

Technological ProgressTechnological Progress

Price

Quantity

D S1

S2

Page 27: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 28: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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

Page 29: Economic Transformation and Growth Dr. George Norton Agricultural and Applied Economics Virginia Tech Copyright 2006

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