A Solow-Swan Type Growth Model of An Economy with Two Classes

In this paper, a Solow-Swan type growth model is constructed for a two-class hypothetical economy with no government in order to highlight the links between group dynamics and aggregate dynamics. A hypothetical society with two classes (rich and poor) is assumed. They share the common technological knowledge but have different production functions. Rich group’s production is capital intensive and the poor group has a labor intensive one. Each group consists of homogenous agents. It is algebraically shown that even if none of the groups are in their steady state, the economy under consideration could be in its steady state as a whole. Furthermore, it is shown that initial capital distribution between groups and their relative weights affect the steady state per capita levels of output and consumption. Finally, a python simulation is added in order to calibrate the model and the effects of an increase in the saving rate on steady state per capita capital and output levels of groups and aggregate economy are shown. Unlike the standard Solow-Swan framework, implicitly based on homogenous agents, this modified model is suitable for analyzing and explaining dynamics of growth for heterogeneous economic unions/groups such as EU and OECD.