Harris Todaro Model

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Explain Harris Todaro Model The Harris-Todaro Model is an economic model used in development economics and welfare economics to explain some of the issues concerning rural-urban migration. The main result of the model is that the migration decision is based on expected income differentials between rural and urban areas, not wage differentials. This implies that rural-urban migration in a context of high urban unemployment can be economically rational if expected urban income exceeds expected rural income. Overview Essentially, the model asserts that an equilibrium will be reached when the expected wage in urban areas, adjusted for the unemployment rate, is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. Also, it is assumed that rural agricultural production and the subsequent labor market is perfectly competitive. As a result, the agricultural rural wage is equal to agricultural marginal productivity. In equilibrium, the rural to urban migration rate will be zero since the expected rural income equals the expected urban income. Assumptions * Dual Economy – Economy said to be dual economy. There exists two sectors, Urban Sector/Modern Sector and Rural Sector * Rural Economy is an agricultural sector and the Urban Economy is depended on industrial sector * Rural work force consists of unskilled labour whereas urban work force consists of skilled labour. In other words, anyone can get employment in rural sector but people in the urban sector need to possess skill to get employment. * Unemployment persists only in modern sector. There is no unemployment in rural sector. * Total number of labour is fixed. * Money wage is also fixed Notations L = Total number of labour/Total labour force in the economy LM = Total number of labour employed in

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