Regional economic disparities under the Solow model

Abstract

In previous analyses of regional underdevelopment, aspects such as technological progress, the implications of growth theory, depreciation (especially capital), capital input, and technology input have been completely ignored. Desmet and Ortίn analyze rational underdevelopment using a Ricardian model. This study investigates the underdevelopment of regions in the light of the Solow model. Two regions with two sectors are considered for the model. The regions are characterized by different technological equipment. The first region is industrial. The second region has an agricultural character. When a new technology is available, both regions can benefit under certain conditions. Financial transfers between regions equalize incomes. The security of transfer payments is positive; the increase in income levels without an increase in productivity is negative. The regions have different depreciation rates, factors, and technology endowments. Enlargement to a growth theoretical model framework (Solow model) should demonstrate the effects of an economy’s investments, constant depreciation rates, population growth, and technological progress. This will make it possible to see how the new influencing factors influence the utility of the two regions.