Non-Steady-State Economic Growth in a Two-Sector World

Abstract

This paper discusses the asymptotic behavior of the neoclassical two-sector growth model when the steady-state conditions are not fulfilled, and derives the asymptotic growth rates for cases in which Hicks neutral technical progress occurs in the investment sector, or Harrod neutral technical progress occurs at different rates in the two sectors. The last section compares the asymptotic properties of this model with the standard steady-state properties of the two-sector growth model. IN THE EIGHTEEN YEARS following the publication of Professor Solow's classic one-sector model [8], much work has been done in attempting to explain the stylized facts of growth by means of aggregate models. However, almost without exception, these models have concentrated on analyzing the properties of the steady-state equilibrium, ignoring the behavior of the economy should a steady state fail to exist. Even those models that have implicitly dealt with the singularity of the steady-state solution2 have done so by attempting to explain why the steady state should occur (for example, Kennedy [5] and Chang [4]), rather than by explaining the non-steady-state properties of their models. In this paper we shall study the behavior of a two-sector economy in which the steady-state conditions are not fulfilled. Our analysis will follow, for the most part, the technique developed by Vanek [12 and 13] and extended by Bertrand and Vanek [2]. In these papers the authors study the behavior of the aggregate capitallabor ratio in a one-sector model in which the steady-state condition is not fulfilled. However, they do not explicitly discuss the asymptotic behavior of the economy, nor do they contrast the asymptotic behavior of the non-steady-state economy to those characteristics attributed to the steady-state world. It is the purpose of this paper to examine both of these issues for a two-sector growth model.3