3. Ricardian theory of growth

Classical theory of growth. Role of distribution in growth.

1. RICARDIAN THEORY OF
GROWTH
Prof. Prabha Panth
Osmania University

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1) Three factors of production –land, labour and
capital,
2) One-good model.
3) Land is fixed in quantity, but differs in quality –
heterogeneous land.
4) Labour theory of value,
5) Capital is circulating capital (Corn) =
wages, not fixed capital,
6) Diminishing returns
7) Malthusian theory of population.
8) Perfect competition, uniform rate of profit.
Assumptions:

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Role of Distribution
a) Wage Rate (w) = wage fund = subsistence w
no of workers
b) Rate of profit (r) = Surplus = Surplus
Capital Wages
As wages = circulating capital.
So there is an inverse relationship between w and
r, as w increases r decreases.
c) Rent: is determined at the margin of
production, both intensive margin and extensive
margin.

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Model of Growth
•Economic growth takes place due to
capital accumulation.
•Capital accumulation is by
capitalists, through investment,
•Investment comes from profits,
•As growth takes place, demand for food
increases, and intensive and extensive
margins of land increases
•Total rents and wages increases.

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•This squeezes out profits, which
eventually falls to zero.
•This point is called the “Stationary State”.
•In Industrial sector also:
–Rate of profit is same in industry and
agriculture,
–Corn is paid as wages.
–With growth, labour input increases, total
wages increase,
–Profits fall, investment falls and also rate of
capital accumulation.

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Stationary State
•Capital accumulation output increases,
•More labour is employed, total wages paid
increases, population increases,
•As demand for corn increases, inferior land is
cultivated –extensive margin
•Or existing land is over cultivated –intensive
margin,
•Rents increases, as margin expands,
•Profits fall, investment falls, and growth rate falls
•This leads to Stationary State.

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•0w3 = wage fund
•w = real wage rate,
•R1w1 = rate of profit =
investment at N1
•K, Q and L increases to
R2,
•Now total wages
increased to w2, and
profit = R2w2.
•The process goes on, till
point S.
•Here profits are zero, no
investment and growth.
•This is the Stationary
State.
0
w
N1 N2
N3
W+Pr =
Q-rent
R1
R2
S
w3
w1
w2

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Solution for Stationary State
•Growth can be restored through import of
corn i.e. through international trade,
•Repel the corn laws, which is beneficial to
landlords only.
•Protection leads to increase in corn prices
as the margin increases.
•This increases rent not profits, which are
consumed.