Relative Prices, Growth and Trade in a Simple Ricardian System

The Ricardian system appears to have fascinated every generation of economists since its original formulation. Ours is no exception. Knight (1935), Stigler (1952), Kaldor (1956) and Samuelson (1959) to mention only some of the most eminent theorists of our time, have all devoted papers to examining and appraising the nature of Ricardo's unique contribution to economic analysis. Piero Sraffa (1951), in addition to his monument of scholarship in a complete edition of Ricardo's works and correspondence, has also given in his Introduction a penetrating interpretation of the evolution of Ricardo's thought. Pasinetti (1960) has presented a mathematical formulation of the Ricardian system in which it appears as a simple but elegant and determinate two-sector general equilibrium growth model. The first section of this paper gives an elementary diagrammatic solution of the Ricardo-Pasinetti model, in terms of demand and supply, which serves as the basis for the analysis of the rest of the paper. The second section examines the role of demand in the model and the effects of technological changes on relative prices and the distribution of income. The final section extends the model to consider international trade.