Rural Economic Development

20th Century Trends
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4 Growth Theories (plus who made them)Stages of Growth (Rostow), Structural Change (Arthur Lewis), Neoclassical, Endogenous (Gunnar Myrdal, Kaldor, Paul Romer, Paul Krugman)Stages of Growth TheoryTraditional Society (subsistence agriculture and hunting and gathering), Preconditions to Take-off (increase in specialization and market formation), Take-off (critical amount of surplus capital and financial system), Maturity (Research and Development and innovation), High Mass Consumption (service sector becomes very important)Structural Change TheoryBranches off from Stages of Growth: Includes Prosperous and Lagging region with labor going from lagging to prosperous and the economy "structurally changing" from rural to urban; does not take into account labor-saving tech, which would staunch the labor flowNeoclassical Growth TheoryOutput = a function of labor and capital; K/L is inversely related with K (return on capital) and directly related to L (wage rate); prosperous region will have high wage rate (low labor amount) and low return on capital (high initial investment costs), while lagging will have low wage rate (high labor amount) and high return on capital (low initial investment costs); not useful for many regions, does not account for agglomeration, ignores input limitations; strengths include factoring mobility, familiar to economists, precise and flexibleEndogenous Growth: Gunnar MyrdalCumulative Causation: Spread Effects (lag region can sell to prosper region, lag residents can commute to prosper region, cheap L and K attract some investment from prosper region, technology benefits from prosper region) are less than the Backwash Effects (brain drain of young and educated to prosper region, concentration of business around agglomeration i.e. prosper region)Endogenous Growth: KaldorCumulative Causation: Output growth increases (more input leads to more output) cause productivity increases (same input creates more output), which cause lower wage efficiency (wage / output)Endogenous Growth: Paul RomerUses technological innovation as main drive of economy with monopolies and patentsEndogenous Growth: Paul KrugmanCentripetal forces attract economic activity (railroads) and Centrifugal forces limit economic growth (pollution, crime, congestion)5 points made by the Theories of GrowthGrowth requires clearly defined and enforced institutional rules, comparative advantage, technological progress, improvement of human capital over time, and well functioning markets with K accumulationExport Base TheoryRegional Income = function of export activities; assumes no input constraints and export goods are not imported; strengths include easy to implement, emphasizes importance of open economies; weaknesses include less useful in large regions, ignores inputs as a constraint, not a dynamic explanation of growth (uses only one variable)Central Place TheoryPeople minimize travel time and firms maximize market areaCommunity Market AreaDistance between A and B communities / (1 + sqrt (population of B / population of A))Potential SalesCommunity population x state sales per capita x (local per capita income / state per capita income)Percent of Retained SalesActual sales / potential salesTotal Area Captured (# shoppers)Annual sales for community i and sector j / ((Annual state sales for sector j / state population) x (local per capita income / state per capita income))Pull FactorTrade area captured / community population; greater than one is good, otherwise sales leakageLocation Quotient% local employment in sector i / % national employment in sector i; greater than one means exportingPopulation - Employment RatioPopulation of community in sector i / employment of community in sector i; larger number means more potential for import substitution (substituting local production for imports)Location TheoriesSpatial Profit Maximization (where to locate new factory), Behavioral (personal utility functions), Institutional (one buyer and one seller)Spatial Profit Maximization: Least Cost LocationFind region with best access to input/output markets, then shift within region based on how advantageous each input or market is to businessSpatial Profit Maximization: Demand MaximizationLower production costs, lower transportation costsLocation Theory: Institutional ApproachMonopoly (business looking to relocate or expand) and Monopsony (community) fight over price of commodity (ex: water); business can always go to different community or not cooperate4 Issues of Smokestack ChasingHard for rural areas to overcome advantageous of agglomeration in most cities; Product cycle (R&D: high wage, high price, very specialized, Refinement: still high price, firm has monopoly but selling to more people, Product Naturalization: widely available, patent expired, low wage and low price) means wages still low in rural areas; Each locality invests more to attract business, but the benefits of the business stay the same; Zero-sum game says increased economic activity for one community detracts from other communities5 Strategies to Improve Industrial Development ProspectsAttract new employers, get help from state or federal government, increase firms profitability, increase local ability to capture existing dollars, encourage new business formations