Economic Growth and Development by Sibabrata Das & Alex Mourmouras & Peter Rangazas

Author:Sibabrata Das & Alex Mourmouras & Peter Rangazas
Language: eng
Format: epub
ISBN: 9783319897554
Publisher: Springer International Publishing

6.3.8 Transitional Dynamics in an Open Economy

We can study the transitional dynamics of the open economy in the same manner as we did for the closed economy. The linear approximation to the dynamic system in the open economy is

(6.34)

where

One can show that there is at most one stable eigenvalue associated with the linear system (see Problem 13). So if there is a convergent path to the steady state, it is unique. For the same parameter values used in the closed economy setting, there is an array of possibilities for the open economy that depend on the international price of agricultural goods and the corresponding size of the modern sector. The lower the price of agricultural goods, the greater the size of the modern sector. Table 6.1 below exhibits some possibilities and the corresponding value of the stable eigenvalue.Table 6.1Open-economy dynamics

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