6 - Two-sector models of optimal economic growth

Abstract

This chapter analyzes two-sector models of optimal economic growth. The Ramsey's model of optimal economic growth is of simple mathematical structure yet displays in a clear light some of the fundamental and inescapable economic issues associated with economy-wide planning. For purposes of illustration, therefore, it has been almost ideal. Nevertheless, the model is based on several assumptions, which seem highly restrictive to an economist. Given these assumptions, some important issues cannot be posed and others can be stated only in an incomplete or distorted form. In particular, it has been assumed that the population and the state of the arts are constant and that the economy produces just one multipurpose commodity which, new or old, can serve both as consumption good and as capital good. This chapter explores the implications of relaxing some of these assumptions. The chapter also explores the problem of the capital good freely transferable between industries.