Flexible Technologies and Classical Saving

This chapter examines a two-sector economy with flexible sector technologies, but where the saving is a fixed fraction of capital income rather than of total income. From the saving perspective, the model is similar to the canonical classical model of Chap. 7, which contains the corresponding analysis for the one-sector economy. Following the same logic of Chap. 15, we lay down the basic structure of the general equilibrium model and study its properties and in particular, the reactions of the capital good sector to shocks on the capital endowment. These reactions are crucial for understanding the dynamics and the stability properties of the model. The identification of the conditions for the existence, uniqueness, and stability of the stationary solution occurs under the two cases of exogenous and endogenous labor supply. In both cases, main outcome of the dynamic analysis is that the uniqueness and the global asymptotic stability of the long-run capital-labor ratio are always ensured under standard regularity conditions. Knowing the stability properties of the system allows us using the directrix solutions (“balanced growth path”) to evaluate the long-term implications of alternative parameter values and sector specifications. The synopsis of two-sector growth model, originated Uzawa (Rev Econ Stud 29:40–47, 1961; Rev Econ Stud 30:105–18, 1963. Also in: Stiglitz and Uzawa, 1969), at the end of the chapter highlights the importance of the robustness of the general equilibrium dynamics (both with proportional and classical saving) for further progress in dynamic economic modelling with the price system as the central allocation mechanism of the growing factor endowments.