Introduction

In a previous paper, I have analyzed the structure of a two-sector model of neoclassical growth, in which it has been assumed that labor consumes all, while capital only saves. The present paper is concerned with replacing this hypothesis with one which postulates that the propensity to save depends upon the rate of interest and the gross income per capita currently received. The fundamental character of the model remains the same as in, except for the determination of investment and of rate of interest. At any moment of time, capital goods will be newly-produced at the rate at which the marginal efficiency of that capital is equated to the prevailing rate of interest. The prospective rentals to capital goods, which together with expected rates of discount determine the marginal efficiency of capital, are assumed to depend upon current rentals and quantities of newly produced and existing capital goods. The rate of interest, on the other hand, is determined at the level which equates the value, at the current market price, of newly-produced capital goods to the amount of savings forthcoming at that level of the rate of interest.

It is assumed that prospective rentals to capital are positively correlated with current rentals, while they decrease as the quantity of new capital goods increases (with the elasticity less than unity). The average propensity to save is assumed to increase as rate of interest or current income per capita increases, and the marginal propensity to save is assumed less than or equal to unity.