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Equilibrium Growth in an International Economy1

Published online by Cambridge University Press:  07 November 2014

Harry G. Johnson
Harry G. Johnson*
Affiliation:
King's College, Cambridge
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Extract

In recent years Keynesian theory has been extended to the analysis of economic growth by the introduction of a relation between investment and productive capacity to supplement the Keynesian relation between investment and effective demand. Combination of the two relations permits the specification of an equilibrium rate of growth, defined as that rate of growth which maintains full employment of capacity. So far, however, except for some rather brief compients by Mr. Harrod, the development of this model has been largely confined to a closed economy. It is the purpose of this article to extend the model to a two-country international economy, and to deduce certain conclusions about equilibrium growth in such an economy. The analysis proceeds from consideration of an open economy, the rate of expansion of demand for whose exports is given, to consideration of a two-country closed system; and from the assumption that balance-of-payments equilibrium is preserved by international lending and borrowing (Part I) to the assumption that it is preserved by exchange rate adjustment (Part II). No attempt is made to deal with the stability of growth equilibrium and the results of departures from it; because of this, and because of the extremely simple assumptions on which the analysis is conducted, the conclusions derived are of limited practical application. Nevertheless, it is hoped that they may have some usefulness as a logical frame of reference for discussion of international growth problems.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 19 , Issue 4 , November 1953 , pp. 478 - 492
Copyright
Copyright © Canadian Political Science Association 1953

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Footnotes

1

Preparation of this article began in the autumn of 1950 with an unpublished study which appears here as the “pure lending” case which concludes Part I. Further work on the problem was carried on during my tenure of a Visiting Professorship in the Graduate School of Economics, University of Toronto. I should like to express my gratitude to colleagues there, particularly Professor G. A. Elliott and Professor Wm. C. Hood, for their advice and encouragement.

References

2 Alternatively, the model can be used to specify the rate of growth which maintains a “normal” degree of excess capacity.

3 R. F. Harrod, Towards a Dynamic Economics, Lecture 4, Section (a), 101–15.

4 These simplifications, and part of the argument of Part II, are derived from Harberger, Arnold C., “Currency Depreciation, Income, and the Balance of Trade,” Journal of Political Economy, LVIII, no. 1, 02, 1950, 47–60.CrossRefGoogle Scholar

5 Cf. Harrod, Towards a Dynamic Economics.

6 The time subscripts of the variables are omitted in the remainder of the argument.

7 For example, in the special case Y0 = 1000, X0 = 100, a = .4, s + m = .12, x = .16, an increase in a to .5 reduces Y at t = 10 from 423.16 to 256.65.

8 This term is used to include the creation of new assets and the redemption of existing assets.

9 Since we are continuing to assume that capital movements are entirely accommodating, there is no need to enter into the complications entailed by the amortization of dated securities. These should not affect the conclusions, if behaviour is governed entirely by income and financial arrangements have no autonomous influence. For an investigation of such problems, however, see Domar, Evsey, “The Effect of Foreign Investment on the Balance of Payments,” American Economic Review, XL, no. 5, 12, 1950, 805–26.Google Scholar

10 This formulation assumes that interest receipts are spent (and interest payments not spent) in the same ratios as home-produced income. It will be observed that, on the assumption that all income from foreign investment is either saved or spent on imports, and that all interest payments are made at the expense of forgone saving and imports, the introduction of interest payments and receipts makes no difference to the conclusions about equilibrium growth arrived at above.

11 Cf. Samuelson, P. A., “The Transfer Problem and Transport Costs: The Terms of Trade When Impediments Are Absent,” Economic Journal, LXII, no. 246, pp. 278–304, especially pp. 289–99.Google Scholar

12 The argument of the rest of this paragraph departs from the assumption that interest income is spent exactly like other income; fuller investigation of the subject would involve amendment of equations (28) and (29). It is of course obvious that if interest payments and receipts affect only saving, the equilibrium growth rates will be unaffected.

56 Clark, J. M., “Toward a Concept of Workable Competition,” American Economic Review, 06, 1940.Google Scholar

57 Samuelson, P. A., “International Trade and Equalisation of Factor Prices,” Economic Journal, June, 1948 Google Scholar; Samuelson, , “International Factor-Price Equalisation Once Again,” Economic Journal, 06, 1949 Google Scholar; James, S. F. and Pearce, I. F., “The Factor-Price Equalisation Myth,” Review of Economic Studies, XIX, no. 2, 1951–1952 Google Scholar; Samuelson, , “Prices of Factors and Goods in General Equilibrium,” Review of Economic Studies, 1953–1954, XXI, no. 1.Google Scholar For an empirical study in unexpected results see Leontief, W., “Domestic Production and Foreign Trade,” Proceedings of the American Philosophical Society, 09, 1953, 332–49.Google Scholar

58 E.g., Chamberlin, E. H., The Theory of Monopolistic Competition (Cambridge, 1933).Google Scholar

59 Fellner, W. J., Competition among the Few (New York, 1949).Google Scholar

60 See e.g. Leontief, W., “The Pure Theory of the Guaranteed Annual Wage Contract,” Journal of Political Economy, 02, 1946, 77–9.Google Scholar

61 von Neumann, J. and Morgenstern, O., Theory of Games and Economic Behavior (Princeton, N.J., 1944)Google Scholar, which has been interpreted in a number of able reviews.

62 See Fellner, William, “Elasticities, Cross-Elasticities and Market Relationships: Comment,” American Economic Review, 12, 1953.Google Scholar

63 See e.g. J. S. Bain, “Price and Production Policies,” in A Survey of Contemporary Economics.

64 Hall, R. L. and Hitch, C. J., “Price Theory and Business Behaviour,” Oxford Economic Papers, 05, 1939, no. 2.Google Scholar

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66 Hart, A. G., Anticipations, Uncertainty, and Dynamic Planning (Chicago, 1940).Google Scholar

67 Katona, G., Psychological Analysis of Economic Behavior (New York, 1951)Google Scholar; Hood, Wm. C. and Koopmans, T., eds., Studies in Econometric Method (New York, 1953), chap. 1.Google Scholar Shackle, G. L. S., Expectation in Economics (Cambridge, 1949).Google Scholar

68 Sweezy, P. M., “Demand under Conditions of Oligopoly,” Journal of Political Economy, 08, 1939, 568–73Google Scholar; Timlin, M. F., “General Equilibrium Analysis and Public Policy,” Canadian Journal of Economics and Political Science, XII, no. 4, 11, 1946, 483–95CrossRefGoogle Scholar; Stigler, G. J., “The Kinky Oligopoly Demand Curve and Rigid Prices,” Journal of Political Economy, 10, 1947, 432–7.Google Scholar

69 Dorfman, R., “Mathematical or ‘Linear’ Programming: A Nonmathematical Exposition,” American Economic Review, 12, 1953 Google Scholar; Hood, Wm. C., “Linear Programming and the Firm,” Canadian Journal of Economics and Political Science, XVIII, no. 2, 05, 1952, 208–12.CrossRefGoogle Scholar

70 Whitin, T. M., “Classical Theory, Graham's Theory and Linear Programming,” Quarterly Journal of Economics, 11, 1953, 520.Google Scholar