A Three-Sector Spatial Growth Model of a Small Open Economy with Capital Accumulation

Abstract

This paper presents a growth model of a small open economy with economic geography. The economy has three - industrial, services and housing - sectors. The economy is located along a line segment and land is for residential use. The model synthesizes the four well-known models in neoclassical growth theory and urban economics - the Solow growth model, Uzawa`s two-sector model, the Alonso urban model, and the Muth housing model - in the context of a small open economy. We analyze the dynamics of a spatial economy and simulate the model over time and space. We show how changes in some parameters, such as the rate of interest and domestic preference, can affect economic structures and land use of the small economy. For instance, the simulation results show that as the rate of interest is increased in the global market, the domestic wage rate, the output levels per worker of the industrial and service sectors, the capital intensities of the three sectors, the capital employed by the three sectors, the national output are reduced, the price of services, the consumption levels of goods, services and housing, the wealth per capita are increased. The labor employment of the industrial sector is reduced and the labor employment of service sector is increased. The housing rent is increased and the land rent is reduced due to the rise in the rate of interest.