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BBTopic4_09

# BBTopic4_09 - INTRODUCTION TO GROWTH THEORY MAIN POINTS...

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MAIN POINTS : Duality of price and quantity systems in a growing economy The technological frontier of income distribution possibilities and the technological frontier of consumption-growth possibilities The dominant technique and “optimal” growth The conceptual jump from analysing a stationary system to the analysis of growth Extending Keynes into the long-run: the approaches of Harrod and Domar Harrod’s “warranted” rate and the “knife-edge” fluke of steady-state, full-employment growth INTRODUCTION TO GROWTH THEORY

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Consider the two-commodity “iron-corn” model, where the economy is growing (uniformly across sectors) at the rate g per period Gross outputs for the two sectors are ( 29 ( 29 ( 29 ( 29 i i ii i ic c c c ci i cc c Y C g a Y a Y Y C g a Y a Y = + + + = + + + 1 . . . 1 . . . ........ (3.1) total investment total investment demand for corn demand for corn total investment total investment demand for iron demand for iron Suppose the growth rate is such that consumption per capita remains constant => ct c t C c N = remains constant, where C ct and N t are corn consumption and population at time t Duality of price and quantity systems in a growing economy
We also assume: in each period output corresponds to demand; there is only consumption demand for corn; => C i = 0 ; the labour force ( L ) seeking work is a constant % of population ( N ) growth is sufficient to provide for full- employment of labour => is constant; and . . c ct i it t l Y l Y L + = t t L N => . . c ct i it t l Y l Y N + is constant Consumption per worker can be expressed as . . . ct t w t c ct i it C N c N l Y l Y = + . . . t c c ct i it N c l Y l Y = + ........ (3.2)

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Defining output per capita as ct c t Y y N = it i t Y y N = one can rewrite expression (3.2) and solve for c c ( 29 . . . c w c c i i c c l y l y = + ( 29 ( 29 ( 29 ( 29 ( 29 . . . 1 . . . . . . 1 c cc i ci w c c i i c c ic i ii i y a y a g c l y l y y y a y a g y + + + + = + + = In turn, the quantity system (3.1) can be expressed as For a given structure or composition of output i.e.
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