• Like
  • Save
3. Ricardian theory of growth
Upcoming SlideShare
Loading in...5
×
 

3. Ricardian theory of growth

on

  • 2,371 views

Classical theory of growth. Role of distribution in growth.

Classical theory of growth. Role of distribution in growth.

Statistics

Views

Total Views
2,371
Views on SlideShare
2,371
Embed Views
0

Actions

Likes
0
Downloads
113
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    3. Ricardian theory of growth 3. Ricardian theory of growth Presentation Transcript

    • RICARDIAN THEORY OF GROWTH Prof. Prabha Panth Osmania University
    • 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:
    • 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.
    • 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.
    • 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.
    • 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.
    • 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
    • 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.