| Abstract |
The primary objective of this article is to present a framework with which to analyze development and long-run growth in a small economy. The foundation of the analysis will be the neoclassical growth model of Solow and Swan, but it will be extended to allow for international capital flows and trade. This is not the first paper to extend the Solow-Swan model along this dimension. However, in all of the previous work technological change was modeled as being disembodied, whereas in the current paper all productivity growth will be embodied within the factors of production. Restricting technological change to be embodied within capital and labour will be necessary in order for the neoclassical growth model to be consistent with recent evidence on technological change, the sources of productivity growth and rates of convergence. Unlike the Solow-Swan model, the current model will not rely on the accessibility of good technology to explain differences in income levels and growth rates across countries. After all, if new technologies are embodied in physical capital, and these goods can be imported; then poor countries should also have access to advanced technologies. That said, poor countries may elect not to import advanced technologies, despite its accessibility. For example, capital embodying advanced technologies will not flow from rich to poor countries if poor countries are deficient in a complementary factor - human capital. The relationship between human capital and technology will be an important feature in the analysis not only for explaining international capital flows but also rates of convergence. |