BBTopic7_06

# BBTopic7_06 - CAPITAL THEORY REVISITED MAIN POINTS Relative...

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MAIN POINTS : Relative prices will vary with distribution and therefore in general input proportions cannot be defined independently of distribution Direction of change in capital to output ratio as r varies depends on technical conditions Heterogeneous capital - can it be characterised by a “surrogate” production function? The aggregate production function - a construct of use only for a one-commodity world Reswitching and reverse capital deepening : no systematic, monotonic relation between relative “factor” prices and “factor” proportions CAPITAL THEORY REVISITED

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Consider a simplified two-sector model, with only labour and commodity two used as inputs: Distribution, input proportions and the choice of technique where ( 29 ( 29 2 2 2 22 1 1 2 21 1 1 p l w r p a p l w r p a m m = + + = + + ( 29 ( 29 21 2 21 22 1 21 21 1 1 1 p wl r p a wl r p a = + + = + + ( 29 ( 29 ( 29 r a l a l l r a w + - + + - = 1 1 1 22 1 21 2 1 22 dw dr < 0 Taking commodity 1 as numeraire ……. .(6.1) ……. .(6.2) ……. .(6.3)
It follows from equation (6.5) that 0 dw dp 21 < 0 dw dp 21 < and therefore 0 a l a l 22 1 21 2 < - where < 2 22 1 21 l a l a where ( 29 21 22 22 1 21 2 21 a a w a l a l p + - = dp dw l a l a 21 2 21 1 22 = - and so that ……. .(6.5) ……. .(6.4) ……. .(6.6) ……. .(6.7)

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Assume all wages are spent and that all profits are spent on consumption => a stationary economy The wage rate is the wage bill per worker => at r = 0, w = net product per worker Slope of
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BBTopic7_06 - CAPITAL THEORY REVISITED MAIN POINTS Relative...

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