Big Push Model - How The Big Push Works

How The Big Push Works

Consider a country whose economy is characterized by a large number of sectors which are so small that any increase in the productivity of one sector has no impact on the economy as a whole. Each sector can either rely on traditional methods or switch to modern methods of production which would increase its efficiency. Let us assume that there are workers in the economy and sectors. Each sector therefore has workers.

Using traditional technology, a sector would produce amount of output, with each worker producing one unit of the commodity.

Using modern technology a sector would produce more as the productivity would be greater than one unit per worker. However, a modern sector would require some of the workers (say ) to perform administrative tasks.

In figure 1, the x-axis represents the labor employed and the y-axis represents the level of production. The production in the traditional sector is given by the curve T and the production in the modern sector is given by M. The curve M has a positive intercept on the x-axis, implying that even with zero production, there is a minimum level of workers who still remain employed for carrying out administrative activities. With our assumption of workers in the economy, the modern sector will have a higher level of productivity than the traditional sector. The production function of the modern sector is steeper than that of the traditional sector because of the higher productivity of workers in the former. The slope of both production functions is, where is the marginal labor required to produce an additional unit of output. This level of is lower for the modern sector than it is for the traditional sector.

Assume that the traditional sector pays workers one unit of output which is subsequently spent equally by them in all sectors. The modern sector pays higher wages to workers. If all the workers are employed by the traditional sector, then the demand generated for the output of each sector is . We have two possible cases:

• Wages are low – When low wages are prevalent in the economy, say, a firm which faces demand will need to employ workers if it wants to modernize. This will cost the firm .

Now, wages are low. Therefore

.

This implies that costs (given by ) are lower than the earnings (given by ). So the firm makes a profit and will choose to modernize (even if other firms do not).

• Wages are high – When high wages are prevalent in the economy, say, a firm which faces demand will make losses if no other firms choose to modernize.

This is because

.

This implies that costs (given by ) are higher than the earnings (given by ).

However, if all the other firms have modernized, the firm faces a higher demand, arising out of higher income levels of workers of these modernized firms. The firm will hence choose to modernize as well so that it makes profits:

.