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General Equilibrium Dynamics of Basic Trade Models for Growing Economies

In: The Elements and Dynamic Systems of Economic Growth and Trade Models

Author

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  • Bjarne S. Jensen

    (University of Southern Denmark (SDU))

Abstract

This chapter presents the structure of two-sector trade models, and it provides a unified framework for analyzing the general equilibrium dynamics of growing two-factor, two-sector trading economies. A major distinction is international trade models for small open (fixed terms of trade) economies and large open economies (international general equilibrium prices). In terms of physical capital accumulation, savings are given by fixed saving rates of national income, or fixed proportions of capital income, or determined optimally by the Ramsey rule. There is exogenous and endogenous labor growth. The growth model for the small trading economy is explicitly solved. The main contribution of this chapter is a series of theorems, which lay down the necessary and sufficient conditions for the existence, uniqueness and asymptotic stability of the long-run capital-labor ratio in several parametric cases, with incomplete as well as complete specialization/diversification. We also derive necessary and sufficient conditions for diversification in two large trading economies.

Suggested Citation

  • Bjarne S. Jensen, 2025. "General Equilibrium Dynamics of Basic Trade Models for Growing Economies," Springer Books, in: The Elements and Dynamic Systems of Economic Growth and Trade Models, edition 0, chapter 0, pages 617-666, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-52493-6_21
    DOI: 10.1007/978-3-031-52493-6_21
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