Author(s)

William Darity¹, Bidisha Lahiri²

¹Sanford School of Public Policy, Duke University, Durham, NC, USA.
²Department of Economics, Oklahoma State University, Stillwater, OK, USA.

This paper examines the implications of generalized returns to scale on the long-period equilibrium in an economy with 2 goods and 2 inputs where one of the inputs is a produced means of production. The Classical definition of long-period equilibrium defined by profit rates being equalized across sectors is used for closure. The model is initially characterized for a closed economy and then extended to a flexible-wage-North and surplus-labor-South model of trade where the North produces only capital and the South produces the consumption good using Northern capital. Neither full employment in the North nor balanced-growth of the integrated economy emerges under non-constant returns to scale. We characterize income distribution between labor and capital and movements of terms-of-trade between North and South.

Generalized Returns to Scale, Surplus, Produced Means of Production, North-South Trade

Darity, W. and Lahiri, B. (2019) Income Distribution and Terms-of-Trade under Generalized Returns to Scale and Capital Accumulation: Implications Using Classical Equilibrium Condition. Theoretical Economics Letters, 9, 2526-2549. doi: 10.4236/tel.2019.97160.