The Ricardian System. A Graphical Exposition

Abstract

Ever since its publication, Pasinetti’s 1960 paper has been a primary reference for all scholars interested in Ricardian economics. However, Kaldor's 1955-6 diagram is a very effective tool for depicting the salient features of the Ricardian system and its full heuristic potentialities are still under-explored. Accordingly, we give it pride of place in this paper. In what follows, after a brief presentation of a slightly amended version of Kaldor’s original diagram, we show how this diagram may be modified to represent Pasinetti’s two-sector model of a closed economy. Next we use it to analyse alternative consumption patterns. Finally, we employ a variant of Kaldor’s diagram to study a two-sector model of an open economy. In a first stage, we study a small open economy facing given international commodity prices; in a second stage, we study the world economy in which international trade takes place among several small open economies.