page_title: Fei–Ranis model of economic growth
section_title: Agricultural surplus as wage fund
hierarchical_section_title: Fei–Ranis model of economic growth / Agricultural surplus / Agricultural surplus as wage fund
caption_attribution_description: English: An integration of the industrial and labour sector graphs shown together
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: Agricultural surplus plays a major role as a wage fund. Its importance can be better explained with the help of the graph on the right, which is an integration of the industrial sector graph with an inverted agricultural sector graph, such that the origin of the agricultural sector falls on the upper-right corner. This inversion of the origin changes the way the graph is now perceived. While the labor force values are read from the left of 0, the output values are read vertically downwards from O. The sole reason for this inversion is for the sake of convenience. The point of commercialization as explained before (See Section on Basics of the model) is observed at point R, where the tangent to the line ORX runs parallel to OX.
  Before a section of the redundant labor force is absorbed into the industrial sector, the entire labor OA is present in the agricultural sector. Once AG amount of labor force (say) is absorbed, it represented by OG' in the industrial sector, and the labor remaining in the agricultural sector is then OG. But how is the quantity of labor absorbed into the industrial sector determined? (A) shows the supply curve of labor SS' and several demand curves for labor df, d'f' and d"f". When the demand for labor is df, the intersection of the demand-supply curves gives the equilibrium employment point G'. Hence OG represents the amount of labor absorbed into the industrial sector. In that case, the labor remaining in the agricultural sector is OG. This OG amount of labor produces an output of GF, out of which GJ amount of labor is consumed by the agricultural sector and JF is the agricultural surplus for that level of employment. Simultaneously, the unproductive labor force from the agricultural sector turns productive once it is absorbed by the industrial sector, and produces an output of OG'Pd as shown in the graph, earning a total wage income of OG'PS.
  The agricultural surplus JF created is needed for consumption by the same workers who left for the industrial sector. Hence, agriculture successfully provides not only the manpower for production activities elsewhere, but also the wage fund required for the process.
caption: Integration of agricultural and industrial sectors to explain use of agricultural surplus as wage fund in a dual economy.
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