DP26 | A North-South Growth Model along Kaldorian Lines


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A North-South growth model is presented which focuses on i) the complementarity of Southern output (consumption goods) and Northern output (capital goods) and ii) the terms of trade as a mechanism linking the growth rates of the two regions. This Kaldorian model is different from recent North-South models of Findlay and Taylor, because the Northern economy is neo-keynesian and the Southern economy is Ricardian. In the long run the growth of both North and South is constrained in this model by the (effective) availability of agricultural land. Also the terms of trade linkage between the two regions is a loose one. As a consequence i) in the short run the terms of trade may overshoot following an exogenous disturbance, and ii) adjustment to full equilibrium may be cyclical, with phases of under- and over-investment in both North and South.