A Suggested Model of Economic Transformation
In this chapter a model of an open economy to illustrate the principles of the industrial transformation process, i.e., investment and disinvestment, is discussed. However, the model is focused on medium run. In the medium time period the time is too shor
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A Suggested Model of Economic Transformation
In this chapter a model of an open economy to illustrate the principles of the industrial transformation process, i.e., investment and disinvestment, is discussed. However, the model is focused on medium run. In the medium time period the time is too short for all things to be reallocated, because of the sluggishness of the market. More precisely, we approach the equilibrium but we cannot reestablish it in full. To counteract the rigidity of the market, and establish equilibrium, the entrepreneur will become important as an economic actor. The key concept of the economic transformation process is the domestic profit rate, or as we here will call it, rate of return, because it is related to investment. Economic transformation will be specified as endogenous, and it will become an integral part of a steady-state equilibrium mechanism.
6.1
Introduction
In times of insecurity and economic turbulence, economic adjustment problems take the central place of the economic discussion. The transformation process, i.e., by transferring resources from no longer viable to more expansive activities of the economy, will be in focus. The transformation process is long term in character and has a long time-lag in its impact on production. Long-term investments in new industrial plants and knowledge in new areas, gives new directions of growth, and consequently, a transformation of industrial structure. To maintain a given level of growth, a frequent structural transformation is necessary. The change of the capital stock is a dynamic process in a dual sense. Firstly the dismantling of old investments subject to physical or economic deterioration, and secondly investment in new and more efficient machines brought into production.1 However, the concept 1
The influence from the Swedish economist Dahme´n is evident here. Dahme´ns contribution to the economic analysis of industrial dynamics has greatly influenced much research both in Swedish economic history and in economic policy. For a survey, see Carlsson and Henriksson (1991). R. Nore´n, Equilibrium Models in an Applied Framework, Lecture Notes in Economics and Mathematical Systems 667, DOI 10.1007/978-3-642-34994-2_6, # Springer-Verlag Berlin Heidelberg 2013
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6 A Suggested Model of Economic Transformation
of economic transformation in the medium run is the key to understanding the importance of individual and collective motivations, and thereby provides the framework for the entrepreneur in the transformation process.2 The long run period is a period of time required for economic agents to reallocate resources, and reestablish equilibrium. However, in the medium time period the time is too short for all things to be reallocated, because of the sluggishness of the market. More precisely, we approach the equilibrium but we cannot re-establish it in full. To counteract the rigidity of the market in medium run the entrepreneur will be important as an economic actor. Entrepreneurial ideas arise (Holcombe 1998) when an entrepren
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