International Trade in a Dynamic Economy

Recent years have witnessed a steadily growing application of the standard two-factor, two-good model to the solution of questions that arise in a growing economy, questions that were first raised in a seminal contribution by Oniki and Uzawa [5]. Although some insights as to what happens in the economy under conditions of growing factor supplies and technology were gained in Chapter 6, the nature of our analysis there was essentially comparative statics, for we were concerned primarily with the implications of exogenous and once-for-all growth in factor supplies. In the present chapter, however, our concern will be the development of a dynamic model where labour grows exogenously at a certain given rate, but where capital grows endogenously as a result of the savings habits of the factor owners. Oniki and Uzawa and, following them, otherst have used a technique which, for want of a better substitute, I call the ‘production function’ technique. The mathematical calculations under this technique are quite lengthy and oppressive, and a superficial glance is sufficient to discourage the student from getting seriously involved with the problem. Fortunately, the technique suggested by the activity-analysis approach used in the past chapters cuts down the length of the derivations and makes the issues susceptible to better comprehension.