World economy and international markets

Lesson 2: Structural changes in development.

Dr. Gonzalo Sanz-Magallón Rezusta

2021-2022
Unit 2: Structural changes in development 2
1. Sectoral changes
1.1. Agriculture: From a “traditional agriculture” to a “modern agriculture”.
Functions of agriculture in economic development: provide labour, reserves, savings & to
increase the size of the domestic market

Productivity rise is based on two types of technologies

- Mechanical : they increase number of hectares cultivated by each worker
- Chemical-biological (“green revolution”): increase value produced per hectare. Biological varieties,
nutrients (animal feed) and fertilizers for plants.
Agriculture productivity is the consequence of two ratios:

Value added / Employment = Value added / Number of hectares x Number of hectares /Employment

Poductivity rise has benefited consumers: decrease in relative prices

Unit 2: Structural changes in development 3

1.1
Sectoral
changes:
Agricult
ure

Unit 2: Structural changes in development 4

.1 Sectoral changes: Agriculture
Agriculture has been traditionally supported by the
public sector. Reasons:

- the need to structure the territory, avoiding

depopulation of rural areas,
- strategic reasons of self-sufficiency,
- price volatility of farm products,
- and the deterioration of prices and incomes received by
farmers

The instruments to favour agriculture:

- structural measures which aim to improve the efficiency

,
- stabilization of prices, such as “regulatory stocks”,
- income support, which are implemented through direct
subsidies, high “intervention prices” or protection
against foreign competition.
Unit 2: Structural changes in development 5
ral changes: Industry
ds to lead productivity improvements, because it assimilates technologica
ques easily and is suitable for the intensive use of capital.
ally enjoys higher multipliers which drags the rest of productive sectors
an be easily exported nowadays, allowing firms to exploit large economies
resources from abroad.
changes. Services:
of services tends to be simultaneous in time to their production.
markets failures” require intense regulations from the Administration.
sector has become the main sector of activity. Demand (Engel’s law)
tors (productivity usually grows at lower rates than the rest of the sect

Unit 2: Structural changes in development 6

Urbanization and clusters formation
Accelerated migration from rural areas to urban regions occurs
as a result of differentials in living standards and wages
between both zones
Table: The Urban Population in Developed Countries and Developing Regions

Unit 2: Structural changes in development 7

 2. Urbanization and clusters form

Clusters are an important source of international

specialization and trade
Main forces that promote the concentration of
industries:
-Market size effects
-Thick labor markes
-Concentration of firms increases the efficiency
of innovation
Unit 2: Structural changes in development 8
3. Trade opennes
Trade opennes is measured as: (Exports + Imports) / GDP

Unit 2: Structural changes in development 9

3. Trade openess

Advantages of international trade

- Allows firms to take advantage of the large size of the world markets
(economies of scale)
- Liberalization generates competitive effects that stimulate efficiency .
- Failure of protectionist policies

Some problems to avoid:

- “Terms of trade” deterioration in non-industrialized countries

- "Dutch disease“.

Unit 2: Structural changes in development

4. Increase of productivity
Determinants of productivity level:
1. The increase in capital available per employee (K/L), “Capital intensity or
deepening” (moving from B to C)
2. “Total factor productivity or Technological progress”: education and training
of workers, efficiency improvements, technological advance,... (moving
from A to B)

Unit 2: Structural changes in development 11

Unit 2: Structural changes in development 12
Real convergence, also known as the catch-up effect, is
the hypothesis that poorer economies will tend to grow at
faster rates than richer economies, as:
- Diminishing returns (of capital) are not as strong as
in capital-rich countries
- Poorer countries can replicate the production methods,
technologies, and institutions of developed countries.

Unit 2: Structural changes in development 13

Determinants of productivity:

Unit 2: Structural changes in development 14

 5. Input-output tables
inter-industrial Uses
transactions Total Final uses
Intermediate
uses
Total
Branch 1 Branch 2 B 3 Consumption GCF X Uses

Branch 1 a11 a12 a13 c 1 CO 1 GCF 1 X 1 U 1

Branch 2 a21 a22 a23 c 2 CO 2 GCF 2 X 2 U 2
Branch 3 a31 a32 a33 c 3 CO 3 GCF 3 X 3 U 3

1 Total intermediate a11 a12 a13 C

C.
2 Compensation to Emp. CE 1 CE 2 CE 3 C.E
3 Gross operating
GOS 1 GOS 2 GOS 3 GOS Final
demand
S.
4=2+3 Value added GVA 1 GVA 2 GVA 3 GVA (GDP)
5=1+4 Production
P 1 P 2 P 3

Value
added Unit 2: Structural changes in development