3LDCs are poor because they lack capital Observation:LDCs have much less capital per worker than rich countries.“Capital” = machinery and equipmentResult: Lower productivity of laborAnd thus Lower wages/incomes.LDCs are poor because they lack capital
17Observation: LDCs often have two quite different sectors: Traditional (subsistence) agricultureLow K/L, low Land/L, “old” technology(NOT: tractors or combines, hybrid seeds, chemical fertilizer, pesticides, herbicides)Result: VERY low productivity and incomes
25“Modern” Industrial Sector Higher K/L, more modern technology than traditional sector (tho often low by rich country standards)Result: Higher productivity and incomesAlso: Large Urban-Rural gaps in income result in migration to the cities
26Urban-Rural Income Ratio: China History, geography and government policy are some of of the reasons that incomes differ. Another important factor is urbanization. This chart displays the ratio of urban disposable income per capita to rural net income per capita.The first stage of reform and opening ended collective agriculture. The result was a substantial increase in rural incomes. As the chart shows, rural incomes increased faster than urban incomes during the early years, and so the income ratio declined.But the urban-rural ratio has been rising since the middle 1980s. By the year 2000, urban incomes averaged 2.8 times rural ones, slightly more than the 2.6 ratio in 1978.
27The National Sample Survey Organization (NSSO) quinquennial surveys provide data on average consumption per capita in urban and rural areas. One omission from these data is housing, but otherwise the data are remarkably comprehensive, including consumption of home production and gifts as well as market purchased amounts. Figure 4.0 displays the urban-rural breakdown for all India in ,and adjusted for inflation.  Average consumption in urban areas is nearly twice that in rural areas. Rural consumption increased slightly faster (38 percent versus 35 percent) over the entire 32 year period. Thus the percentage gap in consumption declined slightly, although the absolute gap clearly widened. There are some inconsistencies in the questionnaire between surveys, and the NSSO price indices for individual states are highly suspect. See Deaton and Dreze (2002), Deaton (2008) and the discussion in Section III below. In this paper the rural and urban series are deflated by the national Consumer Price Indices for Agricultural Labor (CPI-AL) and for Urban Non-Manual Employees (CPI-UNME), respectively (NSSO, 2006, p. 18).