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Poverty traps and economic growth in a two-sector model of subsistence agriculture

Gustav Engström and Dieter Grass. 2011.

Abstract:

This paper demonstrates how a self-reinforcing poverty trap can arise within a standard macroeconomic growth model, solely by recognizing the fact that some goods, such as for example food, are essential to human life. This is done by studying qualitative model dynamics within a twosector growth model of subsistence agriculture. The two main findings are; 1) the introduction of subsistence food requirements in a two sector framework leads to the emergence of poverty trap like features. 2) this also gives rise to an indifference point where the decision maker is indifferent in choosing between two equally optimal solutions. These results are of importance for a wide branch of economic growth papers that have been exploring how subsistence agriculture impacts the transition path to modern economic growth. Our results suggests that when preferences are non-homothetic, as is the case when a subsistence requirement is introduced, this effectively restricts the amount of admissible solutions. Further, the existence of an indifference points also poses a question as to whether the calculated optimal paths, if admissible, are actually maximizing social welfare or are just second best alternatives

Keywords: wo-sector, poverty trap, indifference point, subsistence

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