Income Distribution and Terms-of-Trade under Generalized Returns to Scale and Capital Accumulation: Implications Using Classical Equilibrium Condition

Authors: William Darity, Bidisha Lahiri

This paper examines the implications of generalized returns to scale on the long-period equilibrium in an economy with 2 goods and 2 inputs where one of the inputs is a produced means of production. The Classical definition of long-period equilibrium defined by profit rates being equalized across sectors is used for closure. The model is initially characterized for a closed economy and then extended to a flexible-wage-North and surplus-labor-South model of trade where the North produces only capital and the South produces the consumption good using Northern capital. Neither full employment in the North nor balanced-growth of the integrated economy emerges under non-constant returns to scale. We characterize income distribution between labor and capital and movements of terms-of-trade between North and South.


Journal: Theoretical Economics Letters
DOI: 10.4236/tel.2019.97160(PDF)
Paper Id: 95634 (metadata)

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