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Although Adam Smith held that a country could gain from free trade, he failed to create a convincing economic theory of interregional trade. It is generally agreed that David Ricardo is the creator of the classical theory of trade. The theories of comparative advantage and the gains from trade are usually connected with Ricardo. In this theory the crucial variable used to explain international trade patterns is technology. The theory holds that a difference in comparative costs of production is the necessary condition for the existence of international trade. But this difference reflects a difference in the techniques of production. According to this theory, technological differences between countries determine the international division of labor and consumption and trade patterns. It concludes that trade is beneficial to all participating countries. This conclusion is in contradiction to the viewpoint about trade held by the doctrine of mercantilism. In mercantilism regulation and planning of economic activity are held to be efficient means of fostering the goals of a nation. This theory assumes that production costs are independent from factor prices and the composition of output. Since it lacks consideration of the demand side, the theory cannot determine how and at what value the terms of trade are or should be. The Ricardian theory failed to determine the terms of trade, even though it can be used to determine the limits in which the terms of trade must lie. It was recognized long ago that in order to determine the terms of trade, it is necessary to build trade theory that not only takes account of the productive side but also the demand side.

Chapter 6 propounded a regional model with spatial structures. But the model is static as we neglect dynamics of any growth factors. This chapter will extend the model proposed in Chapter 6 to deal with issues of regional dynamics with spatial structures. This chapter develops a dynamic urban model synthesizing the two main approaches in urban economics. The former is mainly initiated in the seminal work of von (1826) and further developed in the pioneering works by (1956), (1957), (1961) and (1964). The review of the current literature can be found, e.g., in (1989). This approach explains static spatial pattern without explaining growth mechanisms, such as capital and knowledge accumulation (not to say population growth and trades), of cities. The latter, i.e., the neoclassical urban growth theory, is mainly concerned with economic mechanisms of urban growth (e.g., Henderson, 1985). But it neglects structural pattern formation process. The purpose of this chapter is to suggest a compact framework by combining the basic ideas of these approaches to explain urban dynamics with endogenous urban pattern and capital and knowledge accumulation.

Over the years there have been a number of attempts to modify neoclassical consumer theory to deal with economic issues about endogenous labor supply, family structure, working hours and the valuation of traveling time (Becker, 1965, 1976, Mills and Hamilton, 1985, Folbre, 1986, Chiappori, 1988, 1992, Persson and Jonung, 1997, 1998). For instance, there is an increasing amount of economic literature about sexual division of labor, marriage and divorce, and decision-makings about family size. It has been argued that the increasing returns from human capital accumulation represent a powerful force creating a division of labor in the allocation of time between the male and female population (e.g., Becker, 1985). There are also studies on the relationship between economic growth and the family distribution of income (e.g., Fei, Ranis and Kuo, 1978). There are studies of the female labor supply. Women choose levels of market time on the basis of wage rates and incomes. Lifetime variations in costs and opportunities — due to children, unemployment of the spouse, and general business cycle variations — influence the timing of female labor participation (e.g., Mincer, 1962, Smith, 1977, Heckman and Macurdy, 1980). Possible sexual discrimination in labor markets has also attracted the attention from economists (e.g., Cain, 1986, Lazear and Rosen, 1990). The gains from marriage may be reduced as people become rich and educated. The growth in the female population’s earning power may raise the forgone value of their time spent at child care, education and other household activities, which may reduce the demand for children and encourage a substitution away from parental activities. Divorce rates, fertility, and labor participation rates may interact in much more complicated ways. Decision making about on family size is extremely complicated (e.g., Becker, 1981, Weiss and Willis, 1985).

The previous chapters of regional dynamics are concerned with one-sector economies. But to explain economic mechanism of division of labor and competitive equilibrium in labor market, the one-sector model is not sufficient to provide insights into dynamic processes of division of labor and interdependence between division of labor, knowledge and efficiency. It is necessary to extend the one-sector economy into a multi-sector economy. This chapter is to provide a theoretical framework for studying the interdependence among the division of labor, growth of population, wealth accumulation, income distribution, and prices and profits determination within a multi-regional context.

In my previous books (Zhang, 1999, 2000, 2001), I endeavored to examine various aspects of national, urban, and international economies with a few concepts within a single framework. This book applied the basic concepts in these books to explore complex interdependence between economic growth, economic structures, and sexual division of labor within an interregional context. It explored the complexity of interregional trade within the same framework that I employed to examine national, urban, and international economies. Trying to say many things with as a few concepts and techniques as possible should be the manifestation of the bona fide mind of the economist. (1993:271) once recounted: “‘Are you still standing there,” condescendingly asked the much-traveled Sophist of Socrates, ‘and still saying the same thing about the same thing?’ ‘Yes,’ answered Socrates, “that I am.”

Various models were proposed to explain why regions trade and how interregional trade patterns are determined. Different economists emphasize various factors, such as differences in resources, capital accumulation and technology, in explaining trade issues. In Chapter 2, we studied regional growth and interregional trade patterns. The concern of this chapter is still to extend the model developed in Chapter 2. The main difference of this chapter from Chapter 2 is related to behavior of households of different regions. We consider endogenous time in our chapter.

Regional location, interaction, economic structure and dynamic processes of various social and economic activities under different institutions are the main concerns of regional science. Regional economic analysis is to analyze regional location, regional demand and supply, prices of goods, services, distribution of immobile factors such as land and amenities among various activities, and interregional (monetary, material and information) flows (e.g., Isard, 1960). It is greatly desirable to develop a consistent framework to take all these important aspects of regional economies. From an economic structural point of view, it may be argued that two modelling frameworks are important in dealing with multiregional economic issues. The first is the interregional input-output analysis (e.g., Leontief, 1936, 1941, Isard, 1953). Although the input-output systems have proved effective for analyzing economic structure with complicated linkages among various sectors in multi-regional or multinational systems, it may be argued that it is often analytically difficult to introduce endogenous behavior of households in an effective way. The second is equilibrium approach. There are many efforts on applying and extending the general equilibrium model to multiple regional systems. But as well argued by (1992), equilibrium economics has failed in providing significant insights into the complexity of economic geography (see, e.g., Alonso, 1964, Beckmann, 1968, Greenhut, Norman and Hung, 1987, Krugman, 1991, Rauch, 1991, Fujita, 1989). We refer the comprehensive review, by (1992), on the reasons that the current models do not seem to integrate the spatial factor satisfactorily.

This chapter is to introduce education into the interregional modeling framework proposed in the preceding chapters. It is important to examine the role of the university education and research on economic development at the regional scale. Universities play a central role in regional innovation systems as producers of basic research. The importance of basic research is due to the public good nature of the research and positive externalities to the private sector in the form of knowledge spillovers. Regional economies have experienced dramatic changes in different parts of the world in the last few decades. These changes in economic development are influenced by increases of the share of the total resources devoted to R&D, in the educational achievements of the labor force and in the rate of technological change. It has been argued that in developed economies universities and research institutions are the main actors in the knowledge generation process.

The models so far proposed in this book neglect spatial structures of regional economies. Since space may appear in spatial models either in ‘discrete’ terms like in the regional models in the previous chapter or in ‘continuous’ terms like in the well-known Alonso model, it is important to build analytical frameworks for both cases.

People’s preferences and human capital are different. Heterogeneity in preferences among individuals is an important determinant of spatial structure. Individuals may differentiate quite strongly among particular regions based on differences in local climate or amenities available. These differences may have impact on the location of consumers and producers. They may also create spatial agglomeration economies in consumption and production. Many economic theories which explain various aspects of the complexity of economic geography have been proposed. For instance, economic growth theories emphasize economic dynamics with capital, population and knowledge accumulation, but neglect spatial characteristics of economic activities. Some spatial economic models take account of endogenous capital and population growth, but neglect interregional issues (e.g., Henderson, 1985, Miyao, 1987, Richardson, 1977). This chapter tries to propose a dynamic economic growth model with interregional trade, synthesizing the ideas in the standard one-sector neoclassical growth model and the Kaldor-Pasinetti two-group model.

Regions are different in living conditions and productivity. It is observed that tropical people tended to spend less time and energies on working and thinking than people living in regions with proper climates. Regional differentials in natural conditions and cultural attitudes towards work and knowledge play a substantial role in determining regional differences in economic evolution. Nevertheless, economics has not provided a consistent framework to analyze the role of regional conditions such as natural resources and cultural attitudes (toward playing, working, saving, learning, creativity) on economic evolution. This chapter proposes a model of regional economic development based on the growth theory proposed in (1999).

The previous chapter developed models with knowledge and human capital fixed. This chapter treats knowledge as endogenous variables of regional economic evolution. Knowledge creation and utilization is the driving force of modern economic development. A main issue in economics is concerned with dynamic interactions between economic growth, knowledge creation and utilization. The complexity of economic dynamics with endogenous knowledge has recently caused great attention among economists. Although many growth models with endogenous knowledge have been proposed, most of those models are either concerned with national growth or international trades. There are only a few dynamic models which are constructed to address issues related to regional development with endogenous knowledge.

The main issue in this chapter is preference change. Although preferences for leisure time, housing, food, clothes, traveling and so on are varied over time, only a few urban models explicitly deal with endogenous preference changes (Beckmann, 1990, Kobayashi, Zhang, and Yoshikawa, 1986, 1989). There are dynamic interactions between preference change, production structure and residential location. This chapter constructs a dynamics of preference within the frameworks of growth theory and location theory. We model a dynamic interdependence between urban structure, capital accumulation and preference change in a perfectly competitive economy. The chapter is organized as follows. Section 7.1 defines the model with capital accumulation and preference change. Section 7.2 provides conditions for existence of equilibria and stability. Section 7.3 analyzes the impact of changes in human capital on the equilibrium economic structure. Section 7.5 concludes the chapter. The appendix proves Lemma 7.2.1. This chapter is based on Zhang (1996c, 1998c).

This chapter proposes a spatial model within which urban and rural areas are assumed to have different locational characteristics. The model is influenced by the studies related to location of firms with exogenous spatial distribution of demand (e.g., Isard, 1956, Greenhut, 1963, Greenhut, Norman and Hung, 1989) and the studies related to economic geography of residential area with endogenous income and production structure (e.g., Alonso, 1964, Beckmann, 1957, Wingo, 1961, Muth, 1969, Stull, 1974, David and Rosenbloom, 1990, Fujita, 1989, Calem and Carlino, 1991). This chapter constructs a model that bears on problems inherent in economic geography with interactions of demand and supply of various commodities, price structure and spatial division of labor with given preference, territory, labor force and locational amenities. The remainder of the chapter is organized as follows. Section 8.1 represents the basic model. Section 8.2 provides conditions for existence of equilibria. Section 8.3 examines effects of changes in the urban amenity on spatial economic structure. Section 8.4 concludes the study. The appendix proves the results in Section 8.2. This chapter is based on Zhang (1997a).

This chapter introduces endogenous knowledge into the model with heterogeneous population proposed in the previous chapter. Whether economic development will result in the divergence or convergence of income and wealth distribution among various groups of people is one of the main concerns of the classical economists. But only a few theoretical dynamic models explicitly deal with the issues concerning the co-existence of multiple groups. Issues related to the co-existence, separation and stability of multiple income classes are well raised in urban economics within static frameworks of exogenous incomes (e.g., Yinger, 1976, Yellin, 1974, Schare, 1976, Zhang, 1989a). This chapter examines the effects of differences in knowledge utilization and savings behavior between the two groups upon long-run growth and wealth and income distribution within the framework of spatial economics. This chapter is based on Zhang (1993c).

The previous chapter developed models based on the main ideas in the Alonso model and the one-sector neoclassical growth theory. We assumed that knowledge is exogenously given. However, when we study spatial economic evolution, it is too strict to assume knowledge as a given parameter in the dynamic process. Knowledge creation and utilization is the driving force of modern economic development. A main issue in economics is concerned with dynamic interactions between economic growth, knowledge creation and utilization. The literature on economic development has recently been centered on identifying different aspects of dynamic interactions between growth and knowledge accumulation. One of the first seminal attempts to render technical progress endogenous in growth models was initiated by Arrow (1962) emphasizing one aspect of knowledge accumulation — learning by doing. Uzawa (1965) introduced a sector specifying in creating knowledge into growth theory (see also, Zhang, 1990, 1999, Aghion and Howitt, 1992, 1998). The knowledge sector utilizes labor and the existing stock of knowledge to produce new knowledge, which enhances productivity of the production sector. Another approach was taken by, for instance, Kennedy (1964), Weisacker (1966), Drandakis and Phelps (1966), and Samuelson (1965), who took account of the assumption of “inducement through the factor prices”. Schultz (1981) emphasized the incentive effects of policy on investment in human capital. There are many other studies on endogenous technical progresses (e.g., Robson, 1980, Sato and Tsutsui, 1984, Nelson and Winter, 1982, Dosi, Pavitt and Soete, 1990, Johansson and Karlsson, 1990, Grossman and Helpman, 1991). In Romer (1986), knowledge is taken as an input in the production function and competitive equilibrium is rendered consistent with increasing aggregate returns owing to externalities. It is assumed that knowledge displays increasing marginal productivity but new knowledge is produced by investment in research, which exhibits diminishing returns. Various other issues related to innovation, diffusion of technology and behavior of economic agents under various institutions have been discussed in the literature. There are also many other models emphasizing different aspects, such as education, trade, R&D policies, entrepreneurship, division of labor, learning through trading, brain drain, economic geography, of dynamic interactions among economic structure, development and knowledge (e.g., Dollar, 1986, Krugman, 1991, Stokey, 1991, Zhang, 1991a, 1991c, 1997b, Barro and Sal-i- Martin, 1995). It may be argued that there is a theoretical limitation in those works.

Time and space are the two most essential factors for explaining economic reality. Any economic activity takes place at certain place at certain time. Although economic dynamics have caused much attention, the complexity of economic geography has largely been ignored in the mainstream of theoretical economics. It has now become clear that there are a number of potentially important spatial influences, such as public goods, amenities, different externalities, transportation costs, that may challenge the validity of competitive equilibrium theory for explaining a regionally heterogeneous economy. For instance, one of these factors is the so-called capitalization, which implies that the price of land is interdependent with local amenities, economic agents’ densities, transportation costs and other local variables or parameters. Although the significance of capitalization has been noticed by location theorists (Scotchmer and Thisse, 1992), it may be said that we still have no compact framework within which we can satisfactorily explain the issue. Extending the model of the previous chapter, this chapter attempts to suggest a framework to model an economic geographical equilibrium with capitalization.

As mentioned in the introduction, numerous contributions to urban economics have followed the equilibrium theory of urban land market pioneered by Alonso (1964). This approach has been extended in many directions. However, it is argued that one of limitations of urban land-use models is that most of the models concentrate on the residential location and urban structure and neglect production aspects of urban dynamics. On the other hand, urban growth theory is another important theoretical approach to explain spatial phenomena. There are many studies of urban growth and dynamics (e.g., Richardson, 1973, Smith, 1975, Rabenau, 1979, Henderson, 1985, Fujita, et al, 2000). The development of this approach has been influenced by neoclassical growth theory and theory of international trade. From the point of view of economic geography, one of limitations of the urban growth models is that they omit urban land use. We see that the urban economics studies economic geography with wages and capital accumulation fixed and the urban growth theory concentrates on growth factors such as capital accumulation, omitting spatial structures of urban systems. The purpose of this chapter is to develop the dynamic urban growth model to describe the growth of an isolated economic system with economic geography. We explicitly deal with three important and connected aspects of urban economics: growth of production and housing sectors, capital accumulation, and distribution of population over time and space within a compact framework.

So far we have been concerned with isolated economies. International trade was neglected in our analysis. The purpose of this chapter is to propose a simple two- country and one-commodity trade growth model with free capital mobility and urban pattern formation to provide some insights into relationships between commodity prices, factor prices, land values, production, preferences and trade volumes. The growth aspects of our model is based on the international macroeconomic one-sector growth model with perfect capital mobility. Irrespective of the analytical complexity of two-country, dynamic models with capital accumulation, many efforts have been made to examine the impact of savings, technology and various policies on trade patterns within this framework (e.g., Oniki and Uzawa, 1965, Bradhan, 1965, Rodriguez, 1975, Frenkel and Razin, 1987, Ruffin, 1979, Buiter, 1981, Fidlay, 1984, Rauch, 1991). Our modeling framework is based on the dynamic one-sector and two- country model (e.g., Wang, 1990, Ikeda and Ono, 1992, Devereux and Shi, 1991, Zhang, 1994c, 1995a, Tumovsky, 1997). We model behavior of households differently from these one-sector trade growth models in that we explicitly introduce consumption, savings and residential location in modeling decision makings of the households in the two countries.

This book applied the basic concepts and frameworks on growth theory (without space) and trade theory by Zhang (1999, 2000) to explore complex interdependence between economic growth and spatial pattern formation with endogenous capital and knowledge. Since our main purpose was to construct a theoretical framework to synthesize urban economics and neoclassical growth theory in a consistent way, we were concerned only with simplified structures of spatial economies. However, it is not difficult to extend the models in this book to examine other situations of spatial economies. For instance, as in Beckmann (1968), we may distinguish four different locational patterns according to the space requirements of producers and the population density of consumers: (1) producers and consumers are concentrated at point locations and in point markets; (2) producers are located in points, consumers extended through the market area; (3) consumers are concentrated at points, producers dispersed; and (4) both producers and consumers are extended through the market area. We may treat space in spatially continuous frameworks (Beckmann and Puu, 1985, Andersson and Zhang, 1988, Zhang, 1988a, 1988b, 1989b, 1989c). This book explored the complexity of spatial economies within a perfectly competitive framework. Our focus on perfect competition with endogenous capital and knowledge is different from the contemporary mainstream of spatial economics that is mainly concerned with monopolistic competition or fixed prices frameworks (e.g., Arnott, 1996a, 1996b, Greenhut, Norman, and Hung, 1987).

Three economic theories or modeling frameworks have played a significant role in the modern development of theoretical economics. They are the neoclassical growth theory (Burmeister and Dobell, 1970), the urban location theory (e.g., Alonso, 1964, Palma and Papageorgiou, 1988, Scotcmer and Thisse, 1992), and the family economics (Becker, 1976, 1981). Although the neoclassical growth theory has been applied and extended to explain issues about urban and regional growth and development (e.g., Henderson, 1985, Miyao, 1981), there are only a few theoretical efforts which introduce spatial aspects such as residential structures of cities and regions into the neoclassical growth theory. The previous chapters tried to synthesize the main ideas in the urban economics and neoclassical growth theory within a compact framework.

The necessity of building a general dynamic framework of economic geography has been emphasized for a long time. But only a few dynamic models of economic geography have been developed on the basis of economic principles. The following argument by Wilson (1990) still reflects the current situation of regional science: “A major current concern is with patterns of regional development in a variety of contexts and at a variety of spatial scales. Regional science should be able to provide a theoretical basis for this field but it can be argued that it has failed to do so.” Many economic theories which explain various aspects of the complexity of economic geography have been proposed. For instance, economic growth theories emphasize economic dynamics with capital, population and knowledge accumulation, but neglect spatial characteristics of economic activities (e.g., Burmeister and Dobell, 1970). Some urban economic models take account of endogenous capital and population growth, but neglect spatial structure (e.g., Henderson, 1985, Miyao, 1987a, Richardson, 1972); some others deal with residential structures but neglect economic production and endogenous incomes. It is reasonable to ask whether it is possible to develop a compact framework within which main ideas in these economic theories or schools can be discussed. This chapter tries to propose a dynamic economic growth model with endogenous residential pattern formation, synthesizing the ideas in the standard one-sector neoclassical growth model, the Kaldor-Pasinetti two-group model, the multi-group urban models, the Alonso location model and the Muth housing model.

The dynamic relationship between the interregional division of labor, division of consumption and the determination of price structures in the global economy is a main concern of contemporary economics. In fact, economists have produced different trade theories, which deal with various aspects of international and inter-regional trade. Although Adam Smith held that a country could gain from free trade, he failed to create a convincing economic theory of international trade. It is generally agreed that David Ricardo is the creator of the classical theory of trade. The theories of comparative advantage and the gains from trade are usually connected with Ricardo. In this theory the crucial variable used to explain international trade patterns is technology. The theory holds that a difference in comparative costs of production is the necessary condition for the existence of international trade. But this difference reflects a difference in the techniques of production. According to this theory, technological differences between countries determine the international division of labor and consumption and trade patterns. It concludes that trade is beneficial to all participating countries. This conclusion is in contradiction to the viewpoint about trade held by the doctrine of mercantilism. In mercantilism regulation and planning of economic activity are held to be efficient means of fostering the goals of a nation. This theory assumes that production costs are independent from factor prices and the composition of output. Since it lacks consideration of the demand side, the theory cannot determine how and at what value the terms of trade are or should be.

The previous chapters are concerned with international trade patterns and world economic growth without government intervention. But governments may intervene economic growth in different ways (Auerbach and Feldetein, 1990, 1991). It is significant to examine how government’s intervention may affect world trade. This chapter is concerned with a special form of government intervention. We propose a two-country growth model with public sector attributes. The model describes a dynamic interaction between government policy, capital accumulation, national and international distribution of capital and labor, division of labor and capital distribution within each country. We analyze how differences in public policy, human capital and preference structures between countries may affect the global economy.

The previous chapters examined various aspects of international trades. We showed how trade patterns are related to capital accumulation, preferences and sexual division of labor. But in all these models we assumed that human capital is endogenously given. This chapter suggests a dynamic one-commodity and multiple-country trade model to examine interactions between savings rates, trade, knowledge utilization and creativity. Although our model is similar to the dynamic one-commodity and two- country trade model with endogenous human capital (e.g., Wang, 1990), we treat knowledge differently. We consider knowledge as an international public good in the sense that all countries access to knowledge and the utilization of knowledge by one country does not affect that by others. Due to cultural differences, educational systems and policies, knowledge utilization efficiency and creativity differ between countries.

Issues related to international trades are not only one of the main concerns of professional economists, but also a main concern of politicians and the public in general. Various models were proposed to explain why nations trade and how trade patterns are determined. Different economists emphasize various factors, such as differences in national resources, capital accumulation and technology, in explaining trade issues. In Chapter 3, we studied global growth and trade patterns when each country’s labor force is classified into two groups. The concern of this chapter is still to extend the model developed in Chapter 2. The main difference of this chapter from Chapter 2 is related to behavior of households of different countries. We explicitly introduce endogenous savings, time allocation and sexual division of labor in our model.

The preceding chapter introduced endogenous knowledge into the neoclassical trade model. The model was built on the assumption that knowledge accumulates through ‘learning by doing’ without any resources utilization. This assumption is strict in the sense that knowledge creation requires resources. A fundamental character of modern industrial economies is the deliberate large-scale quest for knowledge. The number of workers who generate and manipulate knowledge and information has increasingly become a larger share of the working population. A common important economic question faced with modern economies is how to distribute national resources among knowledge creation, knowledge utilization, education and economic development. It may be argued that national economic comparative advantage among developed economies is mainly due to its advantage in science and technology. Although it is often argued that governments should play a significant role in shaping development of science and technology, the question regarding the appropriate role for governments in encouraging economic growth by supporting scientific research remains vexed. Issues related to whether or not an increased budget for science will improve living conditions both in domestic and international terms are well raised but seldom examined for different conditions.

The previous chapter proposed a trade model with economic structure and endogenous capital. We treated human capital as exogenous variables. This chapter is also concerned with trade and economic structures. We propose a dynamic two- country and multi-sector model with endogenous knowledge accumulation. The model describes a dynamic interdependence between knowledge utilization and creation, international division of labor, land rent and price structure over space under perfect competition. We examine how differences in knowledge utilization and creativity between the two countries may affect the economic geography. It is shown that the economic system may have either a unique or multiple equilibria and each equilibrium may be either stable or unstable, depending on the knowledge utilization and creativity of the production sectors in the two countries. We also examine effects of changes in some parameters on the economic geography.

As mentioned in Introduction, classical economists constructed different trade theories to explain why countries make trade. They argued that countries make trades due to various reasons under different conditions. They trade because they are different from each other. These differences may be either in real terms such as climates, technology and natural resources, or in monetary variables, such as prices, interest rates and wage rates. Classical economists proved that it does often benefit a nation to exchange desirable things which it cannot produce. Nations may benefit from trading as each of them may produce things it does relatively well.

By working thus for a long time at one set of considerations, we get gradually nearer to those fundamental unites which are called nature’s laws: we trace their action first singly, and then in combination; and thus make progress slowly but surely.

This chapter is concerned with dynamic relations between growth, economic structure and trade patterns in a two-country world economy. The model is similar to the two- country, two-good, two factor neoclassical trade. This chapter classifies national product into commodities and services. It is assumed that each country supplies and consumes both commodities and services. We hold that it is significant to classify national product into domestic services and international goods. The issues, for instance, about possible impact of changes of one country’s preferences for its services on the long-run world economic structure cannot be analyzed within the one- commodity framework.

So far we assumed that capital and goods are freely mobile among nations but people are internationally immobile. This requirement is strict for modern economies. Although there are some dynamic models in the literature of trade theory with growth as mentioned in Chapter 2, issues about interactions between growth, trade and migration are not well addressed within a compact analytical framework. It is apparently not only economic factors that determine international migration patterns. Factors such as differences in social status, accessibility to friendship, climates and social environment in the home country and the foreign country are significant in affecting people’s movement. It is necessary to examine migration issues within a framework that takes account of behavior of all the participants in the global economy.

The previous chapter studied a global free-trade economy consisting multiple countries. As in most of formal trade models we assumed that there was a single group of people in each country. We examined interactions between preferences, labor force, capital accumulation and trade patterns. But in reality an economy consists of multiple groups of people. It is reasonable to question what economic impact free trade may have on different groups of people. Does free trade benefit all the groups, or benefit some groups or harm other groups, or harm all the groups in a special national economy? This chapter will study international trade and distribution of income and wealth among multiple groups of people in each country. We are interested in the way in which long-term global economic growth is affected by such factors. This chapter is based on my previous work (Zhang, 1995b).

There are a few formal theoretical models that explicitly deal with issues related to international trade patterns with multiple groups and economic structures. The previous chapters analyzed trade patterns with capital, knowledge and multiple groups. But these frameworks are limited to the case that the world economy produces a single (highly aggregated) good which can be used as either for consumption or investment. In the remainder of this book, we are concerned with world economies with multiple products.

After the Second World War some nations have exhibited very high economic growth rates. The economic conditions in the areas such as Korea, Singapore, Taiwan, and Hong Kong have improved rapidly while in other areas, such as the People’s Republic of China, economic conditions have remained at an undeveloped level. Many cultural and political factors help to explain the developmental differences among these Asian nations. One of the main factors determining such differences may be the differences in attitudes toward savings and education held by the respective areas. It has been well recorded that savings rates have exhibited great differences in different countries over the world. For instance, Japan, South Korea and Taiwan have much higher savings rates than the Western Europe and the United States. Even in the same country saving behavior may be quite different in different development periods. Demographic factors and economic factors such as real growth rates, per capita income and wealth were proposed to explain the rapid rise in saving. When we compare saving behavior in these areas at the initial stage of economic development, Koreans saved ‘little’ relative to Japan, but not relative to Taiwan. In the later stage, the three economies’ savings ratios tend to converge. As mentioned by Hsieh and Hsing (1994), one area that has not received adequate attention is the change in saving due to the change in disposable income during different stages of economic development. Considering the permanent-income hypothesis and the Keynesian consumption function, Hsieh and Hsing empirically showed that the MPSs (marginal propensity to saving) for South Korea and Taiwan characterized by rapid economic growth have been on the rise, whereas the MPSs for Thailand and India with moderate or low economic growth have been stable.

The previous chapter was concerned with one-sector growth economies with constant returns to scale. We showed that the economies have unique stable equilibria. This chapter extends the one-sector growth model to examine issues related to dynamic economies under changeable returns to scale.

It is reasonable to argue that there are dynamic interactions between economic growth, capital accumulation, creativity, knowledge utilization, the labor force, the time distribution between work and leisure, and sexual division of labor and consumption. Yet there are only a few theoretical economic models which explicitly take account of these interactions within a compact framework. There is an immense body of empirical and theoretical literature on economic growth with capital accumulation and endogenous knowledge and on complex of time distribution between home and non-home economic and leisure activities. Over the years there have been a number of attempts to modify the neoclassical consumer theory to deal with economic issues about endogenous labor supply, family structure, working hours and the valuation of traveling time (Becker, 1976, Chiappori, 1988, 1992, Folbre, 1986, Mills and Hamilton, 1985, Ashenfelter and Layard, 1992). For instance, there is an increasing amount of economic literature about the sexual division of labor, marriage and divorce, and decision making about family size. It has been argued that the increasing returns from human capital accumulation represent a powerful force creating a division of labor in the allocation of time between the male and female population (Becker, 1985). There are studies on the relationship between economic growth and the family distribution of income (Fei, Ranis and Kuo, 1978). There are studies of the female labor supply. Women choose levels of market time on the basis of wage rates and incomes.

The Solow-Swan model which was built under the influence of Harrod’s and Domar’s works on economic growth opened a new way to modeling economic growth (Solow, 1956, Swan, 1956, Burmeister and Dobell, 1970, Zhang, 1990). The standard neoclassical growth model initiated a new course of development of economic growth theory by using the neoclassical production function and neoclassical production theory, still maintaining the traditional way in handling with consumers behaviors in the dynamic analysis. This book is supposed to construct a comprehensive economic theory under the influence of the neoclassical growth theory, even though I will model consumers’ behavior in a way different from the Solow-Swan model. Using the utility function specified in Section 2.1, I am able to solve many important dynamic economic issues which are difficult to be analyze by the traditional economic theories in a consistent manner.

One of the basic questions in economic theory is why modern economies are incapable of employing, fully and efficiently, their available resources. The existence of labor unemployment is observed in almost all rich, sophisticated and highly technological systems. The history of economic theory shows that it is not an easy matter to theoretically explain the phenomenon. Since Adam Smith there has been a long-traditional belief in economics that freely competitive market can supply the most efficient co-ordination mechanism in optimal allocation of resources. We followed this traditional belief in the previous chapters, showing how market forces should be able to harmonize a number of individual decisions and lead to optimal allocation of resources. In examining free economies we allowed neither ‘fixed wages’ like in the Keynesian economics, nor ‘a generous social welfare policy’ (which may give incentives for some people to be in unemployment state) for unemployed people by the government, nor a mere ‘survival wage’ rate like in the Marxian economics, nor “friction” of structural adaptations in changeable knowledge-oriented economies. It is obvious that if we allowed any of these actually possible situations to exist in our theoretical models, we could not guarantee full employment as in the previous chapters. This chapter is concerned with economic dynamics with unemployment. We propose some models to analyze complex of economic evolution with unemployment. It should be noted that the models in this chapter are not inconsistent with the rest of the book in the sense that if we allow the fixed factors to be determined by market mechanisms, then the models in this chapter converge to the models in the rest of the book, and vice versa.

The explanation of production and accumulation of national wealth and distribution of income and wealth is among the central tasks of economics. The understanding of dynamics of national growth and differences of living conditions and wealth between different groups of people is one of the essential aspects for understanding modern socioeconomic evolution. The issues related to economic growth and distribution were the main concerns of classical economists such as Ricardo and Marx. But there are only a few dynamic (mathematical) models with endogenous savings and income and wealth distribution. It is known that Ricardo claimed that the division is the principal problem of political economy. The discovery of the laws which regulate distributive shares was considered as the principal problem in political economy. We have mainly four economic theories to handle with this principal problem. The Ricardian, Marxian, marginalist and Keynesian theories propose different mechanisms for determining distributive shares. Marx considered the distribution of income between wages and other incomes as the key to explaining processes of capitalist systems. Marx’s economics was based on the assumption that income distribution is determined according to groups. Marxian economics groups the population into capitalists and workers. The group division plays a key role in the determination of the real wage and the determination of capital accumulation. Group power determines the real wage rate. Capitalists are assumed to have a higher saving propensity than workers.

In 1776 Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations which was to become the gospel of free trade and economic liberalism. Because of this book Smith is regarded as the founder of a new science of political economy. It is Adam Smith who was the first to provide a systematic and comprehensive political economic theory of free markets. His theory showed that economic agents driven by motives of self-interest make positive economic contributions to society as a whole. On the micro level each individual is selfinterested; but these self-centered agents produce the public good on the macro level. The economic miracle is achieved through an “invisible hand”. The Wealth of Nations is the first book which so comprehensively and systematically treated economic principles and manifestations of these principles in a consistent way. Smith constructed an economic theory of how markets operate under proper government intervention. He analyzed economic principles of division of labor, determination of prices, rent, profits and wages, accumulation of capital, investment, distribution of capital and land among varied economic activities, regional as well as international trades, education, government’s policy and many other issues. Since the publication of the Wealth of Nations, economists have displayed great admiration of the book. The book provided the scientific vision and the mathematical concepts of economic equilibrium.

Knowledge creation and utilization is the driving force of long-run economic development. A fundamental character of modern industrial economies is the deliberate large-scale quest for knowledge. The number of workers who generate and manipulate knowledge and information has increasingly become a larger share of the working population. A common important economic question faced with modern economies is how to distribute national resources among knowledge creation, education and economic development. It may be argued that national economic comparative advantage among developed economies is mainly due to its advantage in science and technology. Although governments have played significant role in shaping development of science and technology, the question regarding the appropriate role for government in encouraging economic growth by supporting scientific research remains vexed. Issues related to whether or not an increased budget for science will improve living conditions of the society both in short terms and long terms are well raised. A common sense tells us that heavy investment in knowledge creation (for instance, R&D) may either benefit or harm national economic development. For instance, if society spends resources on creating new products, it may economically lose if the research fails to be creative or there is no profitable market for new products. This is similarly true for education. Heavy investment in education does not always guarantee improvement in material living conditions. As shown in this chapter, economic efficiency of education is dependent on factors such as creativity of knowledge creation sector, efficiency of education and resources distribution.

Institutions, customs and other cultural factors play an essential role in affecting economic evolution. On the other hand, these non-economic variables may be strongly affected by economic conditions. There is an intimate interdependence between economic development, institutions and cultural values. In order to examine dynamic processes of the interaction, it is necessary to consider a society as a whole rather than as a system consisting of unconnected parts. This is particularly significant when we are dealing with the evolution of a culture in the long term. For nonlinear science (e.g., Nicolis and Prigogine, 1977, Haken, 1977, Andersson, 1986, Zhang, 1991,1996), we know that the behavior of nonlinear dynamics may be quite sensitive to small changes in some parameters. It may be quite misleading to fix some aspects of social life, such as morals and institutions, in long-run social and economic analysis. Dynamic interactions between morals, class structures, institutions and economic development have been well observed in human history. The social and economic behavior of people are shaped by their ideas. Their modes of thought affect history.