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A Dynamical Theory of Economic Equilibrium - download pdf or read online

By Roos C.F.

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23) By definition (λL1 + λL2 ) = 1 and (λK1 + λK2 ) = 1. In this case also each row in |λ| adds up to unity. 25) By definition |λ| = λL1 λK2 − λL2 λK1 . 26) Now, |λ| = 0 only if the factor intensities in the two sectors differ. If X1 is labourL1 L2 > aaK2 , |λ| > 0. e. aaK1 that λL1 >λK1 and λK2 >λL2 . 25), it follows that if X1 is labour-intensive, an increase in the labour endowment raises X1 by a magnified amount and lowers X2 . If Lˆ exceeds Kˆ then Xˆ 1 > Lˆ > Kˆ > Xˆ 2 But if X1 is capital-intensive, |λ| < 0.

As the (Wx /r) ratio rises the rural sector producers substitute labour by capital. Consequently, aKX rises and aLX falls. At the given output composition, adoption of more capital-intensive technology in the rural sector implies a shortage of capital. This produces a Rybczynski-type effect resulting in a contraction of the capital-intensive urban sector and an expansion of the labour-intensive rural sector. As the urban sector contracts in terms of both output and employment2 and the wage rate in the rural sector increases, the expected urban wage falls short of the rural sector wage, resulting in a reverse migration of labour from the urban to the rural sector.

However, most of the authors have come to the same broad conclusion that in the presence of rural–urban wage differential, the urban development policies cannot mitigate the problem of rising unemployment in the urban sector and therefore indicate to a rural development programme as a possible solution to the problem. This can be easily seen using the general equilibrium set-up we have just outlined. 3) where Sp and Sw are the rates of ad valorem price and wage subsidies given to the rural sector and the urban sector, respectively.

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A Dynamical Theory of Economic Equilibrium by Roos C.F.


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