Multiple choices text and solution Exercise 2

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Q1 1) Lewis Turning Point: The economy consists of two sectors: 1. Traditional, overpopulated, rural subsistence sector, characterized by zero marginal labor productivity (surplus labor, which can be drawn from the agricultural sector without any loss of output) 2. High-productivity modern industrial sector in which labor from the traditional sector is gradually transferred. Process of labor transfer from traditional to modern sector will happen. This migrant labour force accepts low wages corresponding to the living standards prevalent in farming. The modern sector is able to reap profits and—helped by low labour costs—generate savings. This process will continue until all surplus rural labor is absorbed in the new industrial sector • Thereafter, additional workers can be withdrawn from the agricultural sector only at a higher cost of lost food production because the declining labor to land ratio means that the marginal product of rural labor is no longer zero. In other words, no more labour is forthcoming from the underdeveloped, or agricultural, sector and wages begin to rise. This is known as the Lewis turning point. 2) In the IMF working paper, the related sentence about china leads to its moving to be a labor shortage economy. The dominant factor for china’s depletion of surplus factor is demographics. One of the possible solutions that were also discussed in the paper was “relaxing the one-child policy of china and a one-time permanent increase the fertility rate. It was shown that higher fertility will result in a larger working age population and larger potential labor force and so the lewis turning point will delay. Some other solutions that were studied were Higher Labor Force Participation Rates (by for example greater interprovince labor mobility) and…