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The Lewis Model

Describe the Lewis model as a model for structural change. How does the Harris-Todaro model of rural-urban migration differ from the assumptions and the outcomes of the Lewis model?
Economic growth refers to the increasing productive capacity of the country, which results in an increase in productive output and national income. There are numerous theories relating to economic growth and impacts as a result growth. Rural to urban migration has played an important role in growth and has resulted in structural change of an economy. Structural change can be defined as change in the sectors of an economy over a time series. Specific to this The Lewis model demonstrates when underdeveloped economies convert their traditional economic sectors in rural areas into a modern, industrialised urban areas (Todaro, Smith; 2009). The Lewis model is one of two approaches that are based on the structural transformation. The model is based on two sectors and the relationship between the supply and transition of labour and its resulting impact upon development. The Harris-Todaro model focuses upon incomes between rural and urban areas and how they vary, it states that income levels are seen as higher in urban areas which influence migration to the area. Principally, the essence of both models link back to the development of urban areas, and the migration process, however, the assumptions of each model varies which impacts upon the results.
The Lewis model, also known as the two or dual sector model, was developed by Nobel Laureate W. Arthur Lewis in the 1950’s, nevertheless it is still used 60 years on. There are two main aims of the model firstly the transfer of labour, and secondly the impact upon the modern sector through growth of output and employment. One of the two sectors discussed in this model is the traditional agricultural sector in rural areas. The second sector is the industrialised urban area. Labour supply extracted from the traditional agricultural rural area does not affect its output as it is transferred to the modern industrial urban sector. The marginal product of labour is defined as the change in productivity that occurs from a one unit change in labour. The reason as to why output is not affected is due to the marginal productivity of labour being zero due to the overpopulation, which is a key characteristic in the rural area, and thus leading to a surplus of labour. Urban industrialised sector is characterised by high productivity.
The diagram below of the Lewis model illustrates the impact of the transfer of labour on both the traditional and modern sector. I will first discuss the traditional sector diagram (1a and 1b). Diagram 1a demonstrates that as quantity of labour increases total food production increases. This is until a certain point, where it then stabilises and levels off, due to restrictions at this level by labour. Using the total product curve we can then derive the marginal product of labour and the average product of labour. The dashed line passing through both diagrams illustrate the level of labour accessible in the rural economy. Firstly, as discussed previously due to surplus of labour, the diminishing marginal product of labour is zero which is reflected in the diagram. The average product (APLA) of labour is calculated by using the total product of food and dividing it by the labour available, thus giving us the a level of WA food per person. WA represents the real wage income earned in the agricultural sector. The surplus labour which is transferred to the modern sector can be illustrated by the red arrows in diagram 1b.
The next set of diagrams (2a and 2b) focuses on the modern industrial sector. Diagram 2a illustrates the total product of manufacturing curves for three different levels of labour. The total product of manufacturing is a function of capital (KM) and labour (L). The marginal product of labour can be interpreted as demand curves for labour. WA represents average real income in the traditional sector in 1b, whereas WM is the real income in the modern sector. The supply curve in the diagram is completely horizontal, this suggests a perfectly elastic supply, and this would link well with the surplus labour (shown in figure 1b). The demand curve for labour is negatively sloping this is due to declining marginal product influencing. This is highly likely due to the assumption of the modern sector to employ until marginal physical product is equal to real wage (L1 on diagram). The KM curves also represents demand, it rises from KM1 to KM2 and KM3. This is due to the reinvestment assumption that the Lewis model makes, increasing capital stock and in the long run economic growth. The process then continues up until a point where the surplus labour is transferred to modern industrialised sector.
After the self sustaining growth process has stopped, labour from the rural sector will only be transferred at a higher cost of lost food production. One of the key changes is that the marginal product of labour is no longer zero in the rural sector. The structural shift of the rural economic reliance to the urban industrial sector is complete.
An essential idea to consider before discuss the next model is that rural to urban migration has become extremely high, this could affect the probability of employment opportunities and also the impact upon social services of the developing urban area. A model which can explain this relationship between rural urban migration and rising unemployment is the Harris Todaro model. The model states that income is the primary influence the decision making process of migrants, and that they do not consider the difference between expected and actual income they might receive. If the potential income earned in the urban sector is more than expected income in the rural agricultural sector, the higher income would draw the workers to migrate from rural to urban. This would suggest that the only reason for migration is to get higher paid jobs. This process should indeed result in the income difference narrowing due to the interactions of supply and demand. However, the likelihood of this occurring is small, due to high unemployment in urban areas many people have to settle for jobs in the low paid informal sector. Skilled labour and labour with a greater level of education are likely to get better jobs for a good pay in the formal sector. However, it is never guaranteed and many could be over skilled for the job they are doing. Time horizons can be an important factor to consider when making rational decisions. If a worker only considers the current time frame it is highly unlikely that he or she would enter employment at a higher wage than in rural areas. However, the probability would increase if the future likelihood of getting a job is considered. The worker may plan that initially pay is low and the job is fairly low skilled, nevertheless, in time skills improve, connections develop and the job is likely to improve and the probability of a higher income also increases. In this model urban incomes would have to be equated in order for migration from rural to urban to be seen as unbeneficial. Expected income considers two factors; wages and unemployment. If wages in urban areas are higher than rural, the unemployment rate would have to be in accordance to the percentage difference in income. However, there are seen to be more benefits than income in the urban areas, therefore even though unemployment rate may be chronically high people still do attempt to migrate for better quality of life.
The diagram above includes two main sectors; agriculture in the rural area and manufacturing in the urban area. The line AA’ represents labour demand for the agricultural sector and MM’ for the manufacturing sector. Total labour force is on the horizontal axis from OA to OM. The equilibrium wage is thus at the point where the AA’ and MM’ curves cross, E on the diagram. However, if wages in the manufacturing industry is set higher than agriculture at a level WM, the difference from the equilibrium (E) wage rate for agriculture (WA*) is high. When considering the impact of this upon labour it would mean less labour would be able to find jobs in the urban area. From LM to OM to be exact, on the diagram highlights urban area employment, thus leaving OA to LM as rural labour or even unemployment at wage WA**. Nevertheless, many people still chance for employment at a higher wage and migrate to urban areas. The line qq’ shows the line of indifference between rural and urban sectors for jobs. This is calculated by using a formula which shows probability of the likelihood of finding a job in the urban area and the rate at which it is able to equate agricultural income with potential income earned in urban areas (Todaro, Smith; 2009). This results in the equilibrium shifting to point F on the diagram, this lowers the wage from WM bar to WA. However, the labour gap is not reduced, OA to LM is still employment in rural areas or unemployment; as urban labour is LM OM. Thus illustrating the reason as to why unemployment in urban area occurs, people risk migrating in order to achieve a higher wage. However, the probability of finding a well paid job in the formal sector is very low.
Describe both models in detail, with graphs
Compare and contrast the assumptions and how they shape the outcomes.

UAE and India Trade Relationship

In the global economy today, international businesses have taken a new dimension and progression in all forms. Bilateral trade, ties and other crucial development in the global market place today is as interesting to note and observe. One point to ponder over for a thought is the fact that globalization have brought in its baggage a bundle of benefits for global economy. But globalization also has thrown up new challenges for the global economy and international communities. Changing business environment in the backdrop of globalization and internationalization also a have brought about the emergence of new economy. The processes of economic liberalization also have opened up a window of opportunities and possibilities for trading nations. Such instance to the changing events is good for the global economy for many reasons thereof.
Aim of the Study In recent years since the advent of the new millennium, it is being observed that trade relationship between India and UAE has increased dramatically. The development in the regard is also interesting to note for many reasons thereof, given the fact that Indian and UAE economy today is the center of attraction for global economic analyst.
Hence the aim of this study is to take an interested approach to analyze India and UAE trade relation sin the last five years.
Objective of the study As a developing economy, India has taken the global stage by storm. When we emphasized to the economic progression of UAE as well, there is every facts to cover up from an analysis that development is progressing in the right order.
Thus, such an eventual turn of events make for a point to ponder. And it should be clarified herein that the objective of this study is to reflect upon recent events and happenings encompassing UAE and India trade and its relationship at large, which we will discuss successively in parts, so as to drive home the idea of the subject matter.
Scope of the Study Primarily, the scope of this study is based on observing the crucial face of international business in the world economy and its development today. We are of the opinion that there is no shortage of issue and subject to consider in that regard.
Hence, the subject interest that primarily focus on UAE-India trade relationship in the backdrop of international business and its processes overall. Add to it, the scope of this study and analysis also limits itself to these factors as a point to ponder and to drive home the idea overall.
Methodology of the study The methodology initiated for the purpose of this assignment thus is simple enough and can be differentiated between primary and secondary data analysis to the subject matter. Data acquired in that capacity thus, is primarily based on theoretical analysis and assimilation of the subject matter and its discourse from available literature.
Secondarily, the methodology employed as a whole or in parts also is focused on data interpretation to recent news events and happening that is available in all forms of media, be it news reports, governmental circulations, economic news, forums etc, that specially relates to the subject encompassing UAE-India trade relationship in all its essence.
Limitation of the Study In order to have a clearer understanding, it should be clarified again that this study and its analysis limits itself to the following question that arises:-
What defines UAE economy today?
What are the crucial elements and development phase of UAE import and exports with India?
Does UAE-India trade relationship posit a far reaching scope to enhance foreign trade and bilateral ties? If so, what are the possibilities in that regard?
Above all, what are the measures undertaken by UAE policy makers to boosts foreign trade with likeminded trading nations, especially India? Is there any firm level action from UAE part in that respect?
Considering these questions, we feel there is certain amount of limitation; however that does not deter the point to ponder with the study and to analyze these crucial facts despite certain hardship and drawbacks. Yet the limitation itself can be looked upon as a blessing in disguise.
UAE Economy in Context of Macro-Economic Indicator In consideration of this subject and its analysis, it would be crucial and prudent to elucidate UAE economy in content of macro-economic indicators. J M Culburtson have asserted, “macro-economics theory in the theory of income, employment, price and money. P A Samuelson though is of the opinion that ‘macro-economics is the study of the behavior of economy as a whole. It examines the overall level of the nations output, employment, price and foreign trade.” (Dwivedi, 2005, p. 4)
From the basis of this definition in parts, it is clear what macro-economic is all about, which further assists in assimilating and interpreting UAE economic indicators considering the factors as defined. In that respect, data available with Arabian Business, a local news portals states that “despite the economic downturn that was witnessed globally in the early part of 2008, which directly and indirectly affected UAE economy also have showed a sign of recovery.” (Sambidge, 2009) In context of economic news and its indicators as can be interpreted, we feel that UAE economy today is in the right track. To top it all, business also have flourished, so is the economic activities that is gaining steam.
Hence, as far as UAE national output, price and foreign trade are concerned, we assume that recent development is positive, given the economic recovery that is in the right track currently. There is no denying the fact in that regard, although economic indicator available CIA Fact Book states that “as per 2009 estimates and its indicator, UAE economy have shown a slight downturn in its GDP, say nearly by 4%.” (CIAFACTBOOK, 2010)
As per data available with OPEC portal, “GDP per capita is estimated at $49,782, where as GDP at market price is estimated at $229.97 billion approximate.” (OPEC, 2010) What we can interpret from these indicator and figures is the fact that UAE today economy is progressing in the right track, especially the fact that “30 percent of the country GDP is directly related to oil and gas output.” (OPEC, 2010)
However, as per available information from governmental agencies of UAE, it shows that “labor and capital productivity saw a round about improvement in all aspects since 2004. Moreover, government budget in 2004 and 2005 also grew by a partial 15%, whereas trade balance was constant, although inflation shot up by 6.2% in 2005.” (Anonymous) These indicators although not latest present a clear picture of UAE economy and where it is heading.
UAE Export to India in the year 2000-2010 Shifting our analysis to the UAE export with India, we feel that in recent year’s bilateral relations between these two trading nations have taken a new course. Although it should be looked upon that major export trade partners of UAE are “Japan, India, South Korea, Thailand and Iran.” (UAE-Embassy, 2009) But what are interesting to note are the recent developments in context of UAE and India bilateral ties. News report available with the Financial Express states that, “UAE today is looked as a major export destination and tops India export market.” (Bhuyan, 2009) Moreover, “UAE export to India amounted to 10.7% which includes products such as pearls, precious stones, gold and other organic and inorganic chemicals.” (UAE-Embassy, 2009) In that respect, the following statistic limits its data analysis on UAE export to India only.
Hence, data available for the year starting 2001 to 2004 is interesting to note as far UAE export to India are concerned. For the year 2001 “UAE export to India amounted to $654.42 million, while for the year 2002 it was calculated at a value of $918.21 million. However, for the year 2003, UAE export amounted to $959.58 million. As far as 2004 export goes it grew dramatically, which was calculated at an amount of $2065.15 million.” (BusinessSupportCentre, 2009) Successively, for the year 2005 to 2010 UAE export data to India have grown dramatically. For the year of 2005 alone, UAE export was US$ 4641.10 millions. While that for the year 2006, it was estimated at around US$ 4354.08 millions.” (CGoI, 2007)
As we can analyse from the above there is a slight decrease when it concerns the year in between 2005 and 2006. Although, 2007 figures shows that UAE export to India was estimated at close to “US$18.2 billion in 2007″ (ThaindianNews1, 2008), which presents a dramatic increase. Above all, total direct export from UAE to India for the year 2008 alone was estimated at $1.28 billion.” (ThaindianNews, 2008)
Moreover, as far as 2009 and 2010 UAE export data with India goes, it was close to “US$ 303,696.31 for 2009 million, whereas for 2010 it was calculated at around US$ 288,403.31 million.” (DOC)
UAE Import from India in year 2000-2010 Comparing and contrasting the factor encompassing UAE imports there is a clear indication that India also ranks highly in that regard. Major trading partners of UAE in terms of its imports are “China which head the lists, followed by India, the US, Germany and Japan.” (UAE-Embassy, 2009)
Thus, as per data available, UAE import data for the successive year 2001 to 2004 is interesting to analyze. Hence, for the “years staring 2001 UAE imports from India accounted to $2586.26 million. As for the year 2002 Imports was valued at $2500.28 million. For the year 2003, imports was valued at $3336.12 overall. Interestingly considering the year 2004, the value of UAE import from India was estimated at $5093.42” (BusinessSupportCentre, 2009) a drastic jump and increase. For the year 2005 though, “UAE import from India cleared the five landmarks that was calculated at US$7347.88 millions, where as for the year 2006, it was estimated at US$8591.79 millions that does not include petoleum and allied products.” (CGoI, 2007)
Specifically for the year 2007 alone, UAE import from India was a calculated at US$$114 billion” (ThaindianNews1, 2008) a significant increase.
However, as far as Imports for the year 2008 goes, “it is estimated at US$ 3.43 billion.” (ThaindianNews, 2008) This is a good indicator indeed from an economic point of view. For the successive year of 2009, UAE imports from “was estimated at 12% of the overall import, which includes products such as tea, cotton and other things.” (UAE-Embassy, 2009) Latest reports available with Economic Times reports, states that “exports by India to the UAE alone are calculated at 109.23billion Dirham or a direct 24.5% share of UAE direct imports from India for the year 2010.” (TheEconomicNews, 2010)
Scope for enhancing UAE foreign trade with India There is every possible scope to enhance foreign trade between UAE and India. One aspect of it can be emphasized in perspective of bilateral ties and agreements which is crucial to foreign trade and its development.
Thus, we are of the opinion that in order to further strengthen trade activity between UAE and India, the scope for it at best can be reached through ties and agreements in all circumstances. Noting these facts, it is not surprising to relate that such development in the current state of affairs also have showed up.
As per with the news report available with Thaindian News, a web portal for news happening around the global relates that “recently in the last few months of 2010, UAE and India are working out on discussing bilateral trade and taking it a notch ahead by the leadership representative of both these countries, i.e., India and UAE. The good news in that regard is that leadership between these two nations also has come to a consensus and understanding to further strengthened the trade activity among them. There are every aspects that India envoys and leadership is serious enough to strengthened trade and other investment relationship with UAE” (ThaindianNews, India, UAE discuss bilateral trade, 2010) for all the sheer elements attached to it in context of global business and internationalization.
Hence, such development is important and pertinent to enhance the scope for future trade and commerce between India and UAE. And leadership factor and other peculiarities also is taking the right course with is not surprising, but delighted and pleasing to note the possibilities and road map worked out by UAE and Indian leadership and its development in the current state of affairs, which is befitting for both trading nations to enhances their economic co-operation and relationship.
UAE national policy measures to boost foreign trade with India Reports for the year 2009 indicates that “UAE foreign trade have risen dramatically to 9%, which is on the basis of UAE foreign trade policy that is effective enough and wholly based on economic openness and liberalization, where there is abundant scope of opportunities for investors and trading partners,” (AmeInfo, 2010) and looked upon as one crucial facet on any given foreign policy to attract investment and bilateral ties and trade in context of international business.
Actually speaking, WTO review of UAE foreign trade policy also states that “policy of UAE mirrors a liberal economy that has greater scope and potential to enhance economic ties. Yet its performance also can be further improved with certain and specific structural reforms as and when it calls for by UAE leadership. In that capacity, the press release states that abolition of Restrictive Trade Agency laws and the inclusion and adopting competition legislation and other aspects of furthering liberalization process can have a long way to drive UAE economic activity in the process that is befitting.” (WTO, 2006)
Hence, taking these points in consideration, we are of the opinion that UAE national policy measure to boost foreign trade with India also should follows the same course. As far as Restrictive Trade Agency laws is concerned doing away with it or reforming it can comes in handy for UAE to boosts trade with India.
UAE Firm level actions Given the current development, UAE firm level action in context of national policy measure can be emphasized to the economic reforms that have taken place in recent times, which directly links it to the fact in booting trade with India.
Take for instance The Economic Times reports in which it is highlighted that “UAE formulated polices of free economic zones for service sector, especially form Indian companies is one basis of boosting trade with India, and the results in that regard also shows directly in terms of annual growth that is estimated at 33%. (TheEconomicTimes, 2010)
Thus, we can ponder and reflect that in what ever circumstances, liberalization process of UAE policy is as effective as it mandate. The firm level action from the part of policy makers also can be looked within the events reforms encompassing free trade zone that is specific to India in the current state of affairs.
Conclusion We can conclude to the fact that bilateral trade and agreements between India and UAE have showed a positive development in all forms. The recent interest by policy makers of both nations to further supplement trade ties and its relation is also important to note in context of international business.
Furthermore, the point to ponder also si that without any bilateral ties and agreement, facilitating trade and commerce presents a mockery of itself. Hence, the measure undertaken by both nations in terms of policy that is effective to one another have had a close share to boost economic relationship between India and UAE in the current state of affairs.
Thus, what we can finally conclude at this point is the fact that such development is good for the global economy, as well as the national economy of both trading nations.
Findings and Recommendation As far as UAE economic progression is concerned today, many crucial phase of its international business links have been more than befitting for the economy and the nation as a whole. As a result of ties and agreements with trading countries, say India, Japan, US, Iran and China, etc have provided UAE with a connecting channels to fosters international business and its development in a meaningful ways. Add to it, as a result of the hyperactive developments and initiated policies by policy makers in UAE in areas concerning foreign trade have been effective enough to attract FDI, increased export and imports, which directly have a positive bearing on the economy of UAE, and that which also bridged a way to improved relationship as a result of international business and its development in UAE.
As a result of growing economic relations between UAE and India, it is further recommended that policy makers can further undertake many unitary measures to boost trade. Let say signing agreement specific to service sectors, education, FMGC, ownership norms for Indian entrepreneur and IT majors with a willingness to set up Affiliate Company in the UAE.
Focusing on these areas can dramatically have benefitting economic, social, political and cultural recourse for both nations directly and indirectly.