page_title: Fei–Ranis model of economic growth
section_title: Industrial sector
hierarchical_section_title: Fei–Ranis model of economic growth / Connectivity between sectors / Industrial sector
caption_attribution_description: English: Industrial Sector Capital Labor Graph
context_page_description: The Fei–Ranis model of economic growth is a dualism model in developmental economics or welfare economics that has been developed by John C. H. Fei and Gustav Ranis and can be understood as an extension of the Lewis model. It is also known as the Surplus Labor model. It recognizes the presence of a dual economy comprising both the modern and the primitive sector and takes the economic situation of unemployment and underemployment of resources into account, unlike many other growth models that consider underdeveloped countries to be homogenous in nature. According to this theory, the primitive sector consists of the existing agricultural sector in the economy, and the modern sector is the rapidly emerging but small industrial sector. Both the sectors co-exist in the economy, wherein lies the crux of the development problem. Development can be brought about only by a complete shift in the focal point of progress from the agricultural to the industrial economy, such that there is augmentation of industrial output. This is done by transfer of labor from the agricultural sector to the industrial one, showing that underdeveloped countries do not suffer from constraints of labor supply.
context_section_description: Like in the agricultural sector, Fei and Ranis assume constant returns to scale in the industrial sector. However, the main factors of production are capital and labor. In the graph (A) right hand side, the production functions have been plotted taking labor on the horizontal axis and capital on the vertical axis. The expansion path of the industrial sector is given by the line OAₒA₁A₂. As capital increases from Kₒ to K₁ to K₂ and labor increases from Lₒ to L₁ and L₂, the industrial output represented by the production contour Aₒ, A₁ and A₃ increases accordingly.
  According to this model, the prime labor supply source of the industrial sector is the agricultural sector, due to redundancy in the agricultural labor force. (B) shows the labor supply curve for the industrial sector S. PP₂ represents the straight line part of the curve and is a measure of the redundant agricultural labor force on a graph with industrial labor force on the horizontal axis and output/real wage on the vertical axis. Due to the redundant agricultural labor force, the real wages remain constant but once the curve starts sloping upwards from point P₂, the upward sloping indicates that additional labor would be supplied only with a corresponding rise in the real wages level.
  MPPL curves corresponding to their respective capital and labor levels have been drawn as Mₒ, M₁, M₂ and M₃. When capital stock rises from Kₒ to K₁, the marginal physical productivity of labor rises from Mₒ to M₁. When capital stock is Kₒ, the MPPL curve cuts the labor supply curve at equilibrium point Po. At this point, the total real wage income is Wₒ and is represented by the shaded area POLₒPₒ. λ is the equilibrium profit and is represented by the shaded area qPPₒ. Since the laborers have extremely low income-levels, they barely save from that income and hence industrial profits (πₒ) become the prime source of investment funds in the industrial sector.
  Here, Kₜ gives the total supply of investment funds (given that rural savings are represented by Sₒ)
  Total industrial activity rises due to increase in the total supply of investment funds, leading to increased industrial employment.
caption: Capital-Labor Production Function
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