Optimal Equilibrium State in Two-Sector Growth Model

Pete YASHIN

Abstract


Abstract. The paper studies a two-sector growth model for two cases: with flexible technology and with fixed coefficients. Different states of economic equilibrium (steady states) are compared. We find that the price of investment goods with respect to the price of consumer goods should be changed if the equilibrium state has shifted. Therefore, the aggregate production function cannot be considered as a purely technical. We assume that the income distribution is determined by the direct proportionality between the profits and the investment. Then the resulting function of aggregate output is continuous and differentiable in the domain of definition, even if the technology is fixed. In the last case the function has diminishing returns of capital under Uzawa capital-intensity condition; the state of economic equilibrium is stable only when this condition is valid. We suggest that the optimal is an equilibrium state that maximizes the total profit. The model with fixed coefficients predicts the possible existence of such an optimum.

Keywords. Economic growth, Two-sector growth model, Optimal equilibrium state, Uzawa capital intensity condition, Profit maximization.

JEL. O41, E10, D00.


Keywords


Economic growth; Two-sector growth model; Optimal equilibrium state; Uzawa capital intensity condition; Profit maximization.

Full Text:


References


Acemoglu, D. (2008). Introduction to Modern Economic Growth, Princeton University Press.

Corden, W.M., (1966). The two sector growth model with fixed coefficients, The Review of Economic Studies, 33(3), 253–262. doi. 10.1111/j.1467-6435.1971.tb00809.x

Domar, E.D. (1946). Capital expansion, rate of growth, and employment, Econometrica, 14(2), 137-147. doi. 10.2307/1905364

Felipe, J., Fisher, F.M. (2003). Aggregation in production functions: What applied economists should know, Metroeconomica, 54(2-3), 208-262. doi. 10.1111/1467-999X.00166

Harrod, R.F. (1939). An essay on dynamic theory, Economic Journal, 49(193), 14-33. doi. 10.2307/2225181

Kaldor, N. (1955-1956). Alternative theories of distribution, The Review of Economic Studies, 23, 94-100. doi. 10.2307/2296292

Kaldor, N. (1963). Capital accumulation and economic growth. In F.A. Lutz & D.C. Hague, (Eds.), Proceedings of a Conference Held by the International Economic Association. London: Macmillan.

Keynes, J.M. (1936). The General Theory of Employment, Interest, and Money, New York: Harcourt.

Pasinetti, L. (1962). Rate of profit and income distribution in relation to the rate of economic growth, Review of Economic Studies, 29(4), 267-729. doi. 10.2307/2296303

Pasinetti, L. (2000). Critique of the neoclassical theory of growth and distribution, Banca Nazionale del Lavoro Quarterly Review, 53(215), 383-431.

Phelps, E.S. (1961). The golden rule of accumulation: A fable for growthmen, American Economic Review, 51(4), 638-643.

Ramsey, F. (1928). A mathematical theory of savings, Economic Journal, 38(152), 543-559. doi. 10.2307/2224098

Ricardo, D. ([1817] 1951), On the Principles of Political Economy and Taxation, P. Sraffa, (Ed.) with the collaboration of M. Dobb, “The Works and Correspondence of David Ricardo”, Cambridge, Cambridge University Press.

Shaikh, A. (1974). Laws of production and laws of Algebra: The humbug production function, Review of Economics and Statistics, 56(1), 115-120. doi. 10.2307/1927538

Solow, R.M. (1956). A contribution to the theory of economic growth, Quarterly Journal of Economics, 70(1), 65-94. doi. 10.2307/1884513

Sraffa, P. (1960). Production of Commodities by Means of Commodities: A Prelude to a Critique of Economic Theory, Cambridge, Cambridge University Press.

Stiglitz, J.E. (1968). A note on technical choice under full employment in a socialist economy, Economic Journal, 78, 603-609. doi. 10.2307/2229385

Stolper, W.F., Samuelson, P.A. (1941). Protection and real wages, The Review of Economic Studies, 9(1), 58-73. doi. 10.2307/2967638

Swan, T.W. (1956). Economic growth and capital accumulation, Economic Record, 32(2), 334-361. doi. 10.1111/j.1475-4932.1956.tb00434.x

Uzawa, H. (1961a). Neutral inventions and the stability of growth equilibrium, Review of Economic Studies, 28(2), 117-124. doi. 10.2307/2295709

Uzawa, H. (1961b). On a two-sector model of economic growth, I, Review of Economic Studies, 29(1), 40-47. doi. 10.2307/2296180

Uzawa, H. (1963). On a two-sector model of economic growth, II, Review of Economic Studies, 30(2), 105-118. doi. 10.2307/2295808

Zhang, W.-B. (2007). A discrete two-sector economic growth model, Hindawi Publishing Corporation. Discrete Dynamics in Nature and Society. Vol.2007. ID.89464, Doi. 10.1155/2007/89464




DOI: http://dx.doi.org/10.1453/jepe.v4i1.1211

Refbacks

  • There are currently no refbacks.




.......................................................................................................................................................................................................................................................................................................................................

Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE - www.kspjournals.org

ISSN: 2148-8347

Editor: jepe@ksplibrary.org   Secretarial: secretarial@ksplibrary.org   Istanbul - Turkey.

Copyright © KSP Library