Two sector model of economy Rating:
The two sector model of the economy is a simplified representation of how an economy functions, comprising only two sectors: the primary sector and the secondary sector.
The primary sector is concerned with the extraction and production of raw materials, such as agriculture, mining, and forestry. This sector is also known as the "extractive" sector, as it involves the extraction of natural resources from the earth. The primary sector is often characterized by low productivity and low levels of technological advancement, as the processes involved are often labor-intensive and rely on manual labor rather than machinery.
The secondary sector, also known as the "manufacturing" sector, is concerned with the processing and production of finished goods using raw materials and components. This sector includes industries such as manufacturing, construction, and utilities. The secondary sector is typically more technologically advanced and productive than the primary sector, as it involves the use of machinery and other forms of technology to transform raw materials into finished products.
The two sector model is a useful tool for understanding the structure and functioning of an economy, but it is important to note that it is a simplified representation and does not take into account the complexity and diversity of real-world economies. Many economies have a tertiary sector, also known as the "service" sector, which includes industries such as finance, education, and healthcare. In addition, the boundaries between the primary, secondary, and tertiary sectors are often blurred, with many industries having elements of all three sectors.
Despite its limitations, the two sector model is a useful starting point for understanding how economies function and the role that different sectors play in the production and distribution of goods and services. It also helps to highlight the importance of technological advancement and productivity in driving economic growth and development.
For example: Land, Labor, Capital and Entrepreneur. In such a situation, national income will increase beyond 0Y F only in nominal money terms and not in real terms. In the Lewis model, eventually the reservoir of cheap labour gets exhausted, capital accumulation slows down and wages get determined by marginal productivity as in standard economic textbooks. It is thus clear from the above analysis that the flow of money income will continue at a constant level only when the condition of equality between planned saving and investment is satisfied. ADVERTISEMENTS: In other words, the government does not receive any money from the people by way of taxes, nor does the government spend any money on the goods and services produced by the firms or on the resources and services supplied by the households.
Foreigners interact with the domestic firms and households through exports and imports of goods and services as well as through borrowing and lending operations through financial market. It depends on income Y. The vertical distance between the income line and the consumption line shows the level of saving at each level of income. For these reasons capital goods are also called producer goods. ADVERTISEMENTS: Let us make in-depth study of the circular flow of income in two sector, three sector and four sector economy. Column 5 is the total of consumption spending and investment spending. Thirdly, we assume that the economy neither imports goods and services, nor exports anything.
The concept of underemployment equilibrium is illustrated in Fig. It plays a crucial role in the determination of the equilibrium level of national income. For example, the major portion of saving originates from the household sector families. As long as expenditure is equal to income there is no pressure on prices and no inflation. The mystery of physical stature during the industrial revolution.
Income and Output Determination: Two Sector Economy
The dual economy, if it exists, exerts a negligible effect on productivity and income differences, as the poor economy does equate marginal products between sectors. American economic review 84 3 :369—395. Two points are to be noted here: 1. A pertinent question which arises here is what happens to the unsold output. Point B is called the break-even point in the theory of consumption.
Then we draw the consumption line C. This section provides an introduction to two sector growth models. This approach was later extended to two-sector models. What are the key assumption of the Lewis model? This means that investment remains constant at all levels of national income, i. Let us now look at the interdependence of the product and money markets in a simple economy model. What is meant by two sector economy very short answer? There is therefore a circularity in the determination of aggregate capital and the interest rate; moreover, the demand for capital may not be downward sloping. As a result of fall in planned investment expenditure, income, output and employment will fall and therefore the flow of money will contract.
The circular flow model starts with the household sector that engages in consumption spending C and the business sector that produces the goods. Each sector is devoted to the production of a unique good, and there are usually two factors of production that can freely move across sectors. The firms provide payment to the factory owners for procuring factors of production. How does the two sector model works? This represents subsistence consumption, i. Still, this saving function is ad hoc in that it is not derived as the solution of a behavioral maximization process. The IS-LM Curve For our purpose, we elaborate on the Hicksian IS—LM model in a simple, two-sector economy, including household and firm sectors only.
Circular Flow of Income: 2 Sector, 3 Sector and 4 Sector Economy
In the two-sector model, it is assumed that households spend all their incomes as consumer expenditures and purchase the goods and services produced by businesses. So there is no pressure on national income to rise or fall. In fact we have explained above the flow of money that occurs in the functioning of a closed economy with no savings and no role of government. The Concept of Aggregate Demand with a Constant Price Level : In a two-sector closed economy without Government and foreign trade aggregate demand has two components: i Household demand for consumption goods and ADVERTISEMENTS: ii Business demand for capital goods or investment demand. Now, look at the gross national product or income in the simple economy from the viewpoint of its allocation between consumption and saving.
Money Income Flows in the Four Sector Open Economy: Adding Foreign Sector: We now turn to explain the money flows that are generated in an open economy, that is, economy which have trade relations with foreign countries. Induced Investment : Investment is of two types: a Autonomous or independent of income and b Induced or dependent on income. Thus we see that money flows from business firms to households as factor payments and then it flows from households to firms. MIT Press, Cambridge, Massachusetts. The economy then begins to resemble a developed economy. From the circular flows that occur in the open economy the national income must be measured by aggregate expenditure that includes net exports, that is, X-M where X represents exports and M represents imports. Some people save because they have a chance of being unemployed.
What is O ring model? In such a situation only one outcome is possible —a rise in the prices of goods and services. Since income is a function of employment, both are determined simultaneously. The following numerical examples will clearly illustrate how the equilibrium level of national income is determined. Machines are also used to produce other machines or capital goods. Princeton University Press, Princeton, New Jersey.
But, in this case, there is deficiency of aggregate demand due to inadequate investment demand. Thus, the identity iii shows that the value of output produced or sold is equal to the total income received. Is dual economy bad? Journal of economic history 58 3 :779—802. Solution:- Circular flow of income represents the flow of money among the different sectors of an economy. In fact, the gap between the C line and the C + I line measures fixed autonomous investment.