A Centre-Periphery Framework on Kaldorian Lines

Abstract

This paper develops the seminal ideas of Nicholas Kaldor into a Centre-Periphery framework of the world economy where the Centre faces the problem of surplus capacity and effective demand and the Periphery faces a capacity constraint. In such a framework, Harrod-type 'foreign trade multiplier' works in a short run partial equilibrium analysis: a rise in the peripheral output increases demand for output of the Centre. There is some ambiguity in the short-run effect of the peripheral terms of trade on the output of the Centre. In the long-run equilibrium growth of the whole framework the' foreign trade multiplier' does not work. A rise in the factor productivity and/or the growth rate in the Periphery leads to a fall in their terms of trade while the Centre remains unaffected. A rise in the productivity in the Centre affects their factor income - not their terms of trade.