How Do the Richest 1% Owns 50% of Wealth in a SmallOpen Growth Model with Endogenous Wealth and Human Capital
DOI:
https://doi.org/10.7336/academicus.2017.15.04Abstract
This paper extends the growth model for a closed national economy by Zhang (2015) to a smallopen economy. We attempt to explain some economic mechanisms of how the richest one per cent of the population own 50% of national wealth. We consider endogenous wealth and human capital accumulation by heterogeneous households with different preferences and learning abilities as the main determinants of growth and inequality. We describe the production technologies and economic structure on the basis of the Uzawa twosector model. By applying Zhang’s concept of disposable income and approach to household behavior, we describe consumers’ wealth accumulation and consumption behavior. We model human capital accumulation on the basis of Arrow’s learning by doing and Zhang’s creativity with leisure. We simulate the model with three groups of the population, the rich 1 %, the middle 69%, and the poor 20%. We demonstrate the existence of an equilibrium point at which the rich 1% own more than half of the national wealth and the poor 20% less than 10% of the national wealth. We show how the system moves to the equilibrium from an initial state and confirm that the equilibrium point is stable. We also conduct comparative dynamic analysis.Keywords:
inequality and growth, smallopen economy, learning by consuming, wealth and income distribution, heterogeneous householdsDownloads
References

Arrow, K.J. (1962) The Economic Implications of Learning by Doing. Review of Economic Studies 29, 15573.

Arrow, K. J. (1974) General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice. American Economic Review 64, 25372.

Arrow K.J. and Debreu, G. (1954) Existence of an Equilibrium for a Competitive Economy. Econometrica 22, 265–90.

Arrow, K.J. and Hahn, F.H. (1971) General Competitive Analysis. San Francisco: HoldenDay, Inc.

Azariadis, C. (1993) Intertemporal Macroeconomics. Oxford: Blackwell.

Barro, R.J. and X. SalaiMartin (1995) Economic Growth. New York: McGrawHill, Inc.

Benabou, R. (2002) Tax and Education Policy in a HeterogeneousAgent Economy: What levels of Redistrbution Maximize Growth and Efficiency? Econometrica 70, 481517.

Benigno, G. and Benigno, P. (2003) Price Stability in Open Economies. Review of Economic Studies 70, 74364.

Bourguignon, F. (1981) Parentosuperiority of Unegalitarian Equilibria in Stiglitz’s Model of Wealth Distribution with Convex Saving Function. Econometrica 49, 146975.

Burmeister, E. and Dobell, A.R. (1970) Mathematical Theories of Economic Growth. London: Collier Macmillan Publishers.

Debreu, G. (1959) Theory of Value: An Axiomatic Analysis of Equilibrium. Yale University Press, London.

Forbes, K. (2000) A Reassessment of the Relationship Between Inequality and Growth. American Economic Review 90, 86970.

Frank, M.W. (2009) Inequality and Growth in the United States: Evidence from a New Statelevel Panel of Income Inequality Measures. Economic Inquiry 47, 5568.

Gale, D. (1955) The Law of Supply and Demand. Mathematica Scandinavica 3, 33–44

Gali, J. and Monacelli, T. (2005) Monetary Policy and Exchange Rate Volatility in a Small Open Economy. Review of Economic Studies 72, 70734.

Galor, O. and Moav, O. (2004) From Physical to Human Capital Accumulation: Inequality in the Process of Development. Review of Economic Studies 71, 100126.

Galor, O. and Zeira, J. (1993) Income Distribution and Macroeconomics. Review of Economic Studies 60, 3552.

Ilzetzkia, E., Mendozab, E.G., and Véghc, G.A. (2013) How Big (Small?) Are Fiscal Multipliers? Journal of Monetary Economics 60 (2), pp. 239–54.

Kaldor, N. (1956) Alternative Theories of Distribution. Review of Economic Studies 23, 83–100.

Kollmann, R. (2001) The Exchange Rate in a DynamicOptimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation. Journal of International Economics 55, 24362.

Kollmann, R. (2002) Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles. Journal of Monetary Economics 49, 8991015.

Lane, P.R. (2001) The New Open Economy Macroeconomics: A Survey. Journal of International Economics 54, 23566.

MasColell, A., Whinston, M.D. and Green, J.R. (1995) Microeconomic Theory. New York: Oxford University Press.

McKenzie, L.W. (1959) On the Existence of General Equilibrium for a Competitive Market. Econometrica 27, 54–71.

Nikaido, H. (1956) On the Classical Multilateral Exchange Problem. Metroeconomica 8, 135–45.

Nikaido, H. (1968) Convex Structures and Economic Theory. New York: Academic Press.

Pasinetti, L.L. (1960) A Mathematical Formulation of the Ricardian System. Review of Economic Studies 27, 7898.

Obstfeld, M. and Rogoff, K. (1996) Foundations of International Macroeconomics. Mass., Cambridge: MIT Press.

Pasinetti, L.L. (1974) Growth and Income Distribution  Essays in Economic Theory. Cambridge: Cambridge University Press.

Persson, T. and Tabellini, G.E. (1994) Is Inequality Harmful for Growth? Theory and Evidence. American Economic Review 84, 600–21.

Samuelson, P.A. (1959) A Modern Treatment of the Ricardian Economy: I. The Pricing of Goods and Labor and Land Services. The Quarterly Journal of Economics 73, 135.

Solow, R. (1956) A Contribution to the Theory of Growth. Quarterly Journal of Economics 70, 6594.

Uzawa, H. (1961) On a TwoSector Model of Economic Growth. Review of Economic Studies 29, 4770.

Uya, T., Yi, K.M., and Zhang, J. (2013) Structural Change in an Open Economy. Journal of Monetary Economics 60(September), pp. 667–82.

Uzawa, H. (1965) Optimal Technical Change in an Aggregative Model of Economic Growth. International Economic Review 6, 1831.

Walras, L. (1874) Elements of Pure Economics, translated from the French by W. Jaffé, 1954. London: Allen and Unwin.

Zhang, W.B. (1993) Woman’s Labor Participation and Economic Growth  Creativity, Knowledge Utilization and Family Preference. Economics Letters 42, 10510.

Zhang, W. B. (2015). Oscillations in a Growth Model with Capital, Technology and Environment with Exogenous Shocks. Academicus International Scientific Journal, (12), 7393.

Zhang, W.B. (2006) Growth with Income and Wealth Distribution. London: Macmillan.

Zhang, W.B. (2007) Economic Growth with Learning by Producing, Learning by Education, and Learning by Consuming. Interdisciplinary Description of Complex Systems 5, 2138.

Zhang, W.B. (2015) How Do the Richest 1% Own 50% of Wealth in an Integrated Walrasian Equilibrium and Neoclassical Growth Model. The International Journal of Economic Behavior 5 (1), 5980.
References
Arrow, K.J. (1962) The Economic Implications of Learning by Doing. Review of Economic Studies 29, 15573.
Arrow, K. J. (1974) General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice. American Economic Review 64, 25372.
Arrow K.J. and Debreu, G. (1954) Existence of an Equilibrium for a Competitive Economy. Econometrica 22, 265–90.
Arrow, K.J. and Hahn, F.H. (1971) General Competitive Analysis. San Francisco: HoldenDay, Inc.
Azariadis, C. (1993) Intertemporal Macroeconomics. Oxford: Blackwell.
Barro, R.J. and X. SalaiMartin (1995) Economic Growth. New York: McGrawHill, Inc.
Benabou, R. (2002) Tax and Education Policy in a HeterogeneousAgent Economy: What levels of Redistrbution Maximize Growth and Efficiency? Econometrica 70, 481517.
Benigno, G. and Benigno, P. (2003) Price Stability in Open Economies. Review of Economic Studies 70, 74364.
Bourguignon, F. (1981) Parentosuperiority of Unegalitarian Equilibria in Stiglitz’s Model of Wealth Distribution with Convex Saving Function. Econometrica 49, 146975.
Burmeister, E. and Dobell, A.R. (1970) Mathematical Theories of Economic Growth. London: Collier Macmillan Publishers.
Debreu, G. (1959) Theory of Value: An Axiomatic Analysis of Equilibrium. Yale University Press, London.
Forbes, K. (2000) A Reassessment of the Relationship Between Inequality and Growth. American Economic Review 90, 86970.
Frank, M.W. (2009) Inequality and Growth in the United States: Evidence from a New Statelevel Panel of Income Inequality Measures. Economic Inquiry 47, 5568.
Gale, D. (1955) The Law of Supply and Demand. Mathematica Scandinavica 3, 33–44
Gali, J. and Monacelli, T. (2005) Monetary Policy and Exchange Rate Volatility in a Small Open Economy. Review of Economic Studies 72, 70734.
Galor, O. and Moav, O. (2004) From Physical to Human Capital Accumulation: Inequality in the Process of Development. Review of Economic Studies 71, 100126.
Galor, O. and Zeira, J. (1993) Income Distribution and Macroeconomics. Review of Economic Studies 60, 3552.
Ilzetzkia, E., Mendozab, E.G., and Véghc, G.A. (2013) How Big (Small?) Are Fiscal Multipliers? Journal of Monetary Economics 60 (2), pp. 239–54.
Kaldor, N. (1956) Alternative Theories of Distribution. Review of Economic Studies 23, 83–100.
Kollmann, R. (2001) The Exchange Rate in a DynamicOptimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation. Journal of International Economics 55, 24362.
Kollmann, R. (2002) Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles. Journal of Monetary Economics 49, 8991015.
Lane, P.R. (2001) The New Open Economy Macroeconomics: A Survey. Journal of International Economics 54, 23566.
MasColell, A., Whinston, M.D. and Green, J.R. (1995) Microeconomic Theory. New York: Oxford University Press.
McKenzie, L.W. (1959) On the Existence of General Equilibrium for a Competitive Market. Econometrica 27, 54–71.
Nikaido, H. (1956) On the Classical Multilateral Exchange Problem. Metroeconomica 8, 135–45.
Nikaido, H. (1968) Convex Structures and Economic Theory. New York: Academic Press.
Pasinetti, L.L. (1960) A Mathematical Formulation of the Ricardian System. Review of Economic Studies 27, 7898.
Obstfeld, M. and Rogoff, K. (1996) Foundations of International Macroeconomics. Mass., Cambridge: MIT Press.
Pasinetti, L.L. (1974) Growth and Income Distribution  Essays in Economic Theory. Cambridge: Cambridge University Press.
Persson, T. and Tabellini, G.E. (1994) Is Inequality Harmful for Growth? Theory and Evidence. American Economic Review 84, 600–21.
Samuelson, P.A. (1959) A Modern Treatment of the Ricardian Economy: I. The Pricing of Goods and Labor and Land Services. The Quarterly Journal of Economics 73, 135.
Solow, R. (1956) A Contribution to the Theory of Growth. Quarterly Journal of Economics 70, 6594.
Uzawa, H. (1961) On a TwoSector Model of Economic Growth. Review of Economic Studies 29, 4770.
Uya, T., Yi, K.M., and Zhang, J. (2013) Structural Change in an Open Economy. Journal of Monetary Economics 60(September), pp. 667–82.
Uzawa, H. (1965) Optimal Technical Change in an Aggregative Model of Economic Growth. International Economic Review 6, 1831.
Walras, L. (1874) Elements of Pure Economics, translated from the French by W. Jaffé, 1954. London: Allen and Unwin.
Zhang, W.B. (1993) Woman’s Labor Participation and Economic Growth  Creativity, Knowledge Utilization and Family Preference. Economics Letters 42, 10510.
Zhang, W. B. (2015). Oscillations in a Growth Model with Capital, Technology and Environment with Exogenous Shocks. Academicus International Scientific Journal, (12), 7393.
Zhang, W.B. (2006) Growth with Income and Wealth Distribution. London: Macmillan.
Zhang, W.B. (2007) Economic Growth with Learning by Producing, Learning by Education, and Learning by Consuming. Interdisciplinary Description of Complex Systems 5, 2138.
Zhang, W.B. (2015) How Do the Richest 1% Own 50% of Wealth in an Integrated Walrasian Equilibrium and Neoclassical Growth Model. The International Journal of Economic Behavior 5 (1), 5980.
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