Factor Growth and Foreign Investment under Product Market Imperfection in the Harris–Todaro Economy

Abstract

This paper examines the ramifications of an imperfect product market, with reference to factor growth and foreign investment, for a small Harris–Todaro economy with the agricultural (manufacturing) sector under perfect competition (monopoly protected by an import quota). It is shown that factor growth entails multiple component effects of conflicting signs (i.e. the primary growth effect, the distortionary production effect, and production and employment effects induced by changes in the domestic commodity prices), and, hence, can be welfare‐reducing. Similarly, an inflow of foreign capital can be immiserizing when the foreign capital earnings are repatriated at the domestic rental rate.