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Equilibrium Models in an Applied Framework pp 99–107Cite as

A Suggested Model of Economic Transformation

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Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 667))

Abstract

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.

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Notes

  1. 1.

    The influence from the Swedish economist Dahmén is evident here. Dahméns 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).

  2. 2.

    The word “entrepreneur” has its origins in the work of Richard Cantillon in his Essai sur la Nature du Commerce en Général (1755) and Jean-Baptiste Say (1803 or 1834) in his Treatise on Political Economy. According to Jean-Baptiste Say, an entrepreneur is “one who undertakes an enterprise, especially a contractor, acting as intermediatory between capital and labor”. See further Sheshinski et al. (2007).

  3. 3.

    To alternative measures of entrepreneurship, self-employment and the number of patents, are evaluated by Salgado-Banda (2002) in an extensive study on 22 OECD countries for the period 1980–1995. The results are that entrepreneurship measured by patents is positively linked to economic growth and that entrepreneurship measured in terms of self-employment is negatively related to growth.

  4. 4.

    Profitability of investment is here similar to the concept of the rate of return on investment. See Bodie et al. (2011).

  5. 5.

    In the extreme case where σ j is zero, the relation between foreign and domestic investment would be fixed and foreign investment activities become perfect complements of domestic investments.

  6. 6.

    Armour and Cumming (2008) investigate the relationship between bankruptcy laws and entrepreneurship using data on self-employment over 16 years (1990–2005) and 15 countries in Europe and North America.

  7. 7.

    The MSCI World is a stock market index of 1,500 ‘world’ stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is often used as a benchmark for asset allocation decisions and performance measurement. It uses a capitalization-weighted average and individual indices are produced for the different countries, by regions, by industry, by economic sector, as well as a complete world index.

  8. 8.

    Investment is just enough to cover disinvestment, and capital per worker remains constant.

  9. 9.

    This is a well known concept from the Solow model (Solow 1956).

  10. 10.

    Defined as the maximum steady-state consumption per worker.

  11. 11.

    See also Reynolds and White (1993).

  12. 12.

    Here we can draw connections to the field of strategic entrepreneurship. See further von Friedrichs and Boter (2009).

  13. 13.

    See Krugman (1993).

  14. 14.

    The analysis envisaged here, is based on the assumption of substitutability between capital and labor before the installation of new capital equipments but fixed labor requirements after installation.

  15. 15.

    See Dahmén (1989).

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Authors and Affiliations

  1. Department of Social Sciences, Mid Sweden University, Östersund, Sweden

    Dr. Ronny Norén

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  1. Dr. Ronny Norén
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Norén, R. (2013). A Suggested Model of Economic Transformation. In: Equilibrium Models in an Applied Framework. Lecture Notes in Economics and Mathematical Systems, vol 667. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-34994-2_6

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  • DOI: https://doi.org/10.1007/978-3-642-34994-2_6

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