3. Ricardian theory of growth


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Classical theory of growth. Role of distribution in growth.

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3. Ricardian theory of growth

  1. 1. RICARDIAN THEORY OF GROWTH Prof. Prabha Panth Osmania University
  2. 2. 26-Sep-13 2 1) Three factors of production – land, labour and capital, 2) One-good model. 3) Land is fixed in quantity, but differs in quality – heterogeneous land. 4) Labour theory of value, 5) Capital is circulating capital (Corn) = wages, not fixed capital, 6) Diminishing returns 7) Malthusian theory of population. 8) Perfect competition, uniform rate of profit. Assumptions:
  3. 3. 26-Sep-13 3 Role of Distribution a) Wage Rate (w) = wage fund = subsistence w no of workers b) Rate of profit (r) = Surplus = Surplus Capital Wages As wages = circulating capital. So there is an inverse relationship between w and r, as w increases r decreases. c) Rent: is determined at the margin of production, both intensive margin and extensive margin.
  4. 4. 26-Sep-13 4 Model of Growth • Economic growth takes place due to capital accumulation. • Capital accumulation is by capitalists, through investment, • Investment comes from profits, • As growth takes place, demand for food increases, and intensive and extensive margins of land increases • Total rents and wages increases.
  5. 5. 26-Sep-13 5 • This squeezes out profits, which eventually falls to zero. • This point is called the “Stationary State”. • In Industrial sector also: – Rate of profit is same in industry and agriculture, – Corn is paid as wages. – With growth, labour input increases, total wages increase, – Profits fall, investment falls and also rate of capital accumulation.
  6. 6. 26-Sep-13 6 Stationary State • Capital accumulation output increases, • More labour is employed, total wages paid increases, population increases, • As demand for corn increases, inferior land is cultivated – extensive margin • Or existing land is over cultivated – intensive margin, • Rents increases, as margin expands, • Profits fall, investment falls, and growth rate falls • This leads to Stationary State.
  7. 7. 26-Sep-13 7 • 0w3 = wage fund • w = real wage rate, • R1w1 = rate of profit = investment at N1 • K, Q and L increases to R2, • Now total wages increased to w2, and profit = R2w2. • The process goes on, till point S. • Here profits are zero, no investment and growth. • This is the Stationary State. 0 w N1 N2 N3 W+Pr = Q-rent R1 R2 S w3 w1 w2
  8. 8. 26-Sep-13 8 Solution for Stationary State • Growth can be restored through import of corn i.e. through international trade, • Repel the corn laws, which is beneficial to landlords only. • Protection leads to increase in corn prices as the margin increases. • This increases rent not profits, which are consumed.