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Optimal Equilibrium State in Two-Sector Growth Model

Author

Listed:
  • Pete YASHIN

    (UPEC, LKMZ, Lozovaya Town, 24 Svobody St., Kharkiv Province, Ukraine.)

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

  • Pete YASHIN, 2017. "Optimal Equilibrium State in Two-Sector Growth Model," Journal of Economics and Political Economy, EconSciences Journals, vol. 4(1), pages 88-106, March.
    • Handle: RePEc:cvv:journ1:v:4:y:2017:i:1:p:88-106
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    References listed on IDEAS

    as
    1. Luigi L. Pasinetti, 1962. "Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(4), pages 267-279.
    2. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-120, February.
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    Keywords

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    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • D00 - Microeconomics - - General - - - General

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