Equilibrium Growth in an International Economy

In recent years Keynesian theory has been extended to the analysis of economic growth by the introduction of a relation between investment and productive capacity to supplement the Keynesian relation between investment and effective demand. Combination of the two relations permits the specification of an equilibrium rate of growth, defined as that rate of growth which maintains full employment of capacity. So far, however, except for some rather brief compients by Mr. Harrod, the development of this model has been largely confined to a closed economy. It is the purpose of this article to extend the model to a two-country international economy, and to deduce certain conclusions about equilibrium growth in such an economy. The analysis proceeds from consideration of an open economy, the rate of expansion of demand for whose exports is given, to consideration of a two-country closed system; and from the assumption that balance-of-payments equilibrium is preserved by international lending and borrowing (Part I) to the assumption that it is preserved by exchange rate adjustment (Part II). No attempt is made to deal with the stability of growth equilibrium and the results of departures from it; because of this, and because of the extremely simple assumptions on which the analysis is conducted, the conclusions derived are of limited practical application. Nevertheless, it is hoped that they may have some usefulness as a logical frame of reference for discussion of international growth problems.