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Optimal Equilibrium State in Two-Sector Growth Model

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  • Yashin, Pete

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.

Suggested Citation

  • Yashin, Pete, 2017. "Optimal Equilibrium State in Two-Sector Growth Model," MPRA Paper 76524, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76524
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    two-sector growth model; optimal equilibrium state; aggregate production function; Uzawa capital-intensity condition; profit maximization;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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