Economic Growth and Wealth Accumulation with Perfect and Monopolistic Competition

Abstract

This study constructs a growth model by integrating the three basic models in neoclassical growth theory with perfect competition and general equilibrium theory with monopolistic competition. The economy is composed of three sectors – the final good sector as in Solow’s one sector growth model, the middle goods sector for final good as Grossman and Helpman’s intermediates sector (which supplies intermediate inputs for the final good sector), and the middle goods sector for consumption as Dixit and Stiglitz’s intermediates sector (which supplies goods for consumption). Our model is different from the Solow model in that we model the household behavior with the utility function and disposable income proposed by Zhang. We deviate from the Dixit-Stiglitz model and the Grossman- Helpman model in that we distribute the profits of firms in monopolistic competition to households. We build and then simulate the model. We demonstrate the existence of a unique stable equilibrium point and plot the motion of the economy. We examine the effects of exogenous changes in some parameters. The comparative dynamic analysis analyzes the effects of the exogenous changes on transitory process and long-term equilibrium structure.

Keywords

• solow model; perfect competition; dixit-stiglitz model; grossman and helpman model; monopolistic competition; wealth accumulation; profit distribution; general economic equilibrium.