The Wage Fund Theory and the Gains from Trade in a Dynamic Ricardian Model

This paper explores the role of wage fund as the basic source of credit, capital or finance in a dynamic Ricardian model, which consists of three classes of agents: the workers, the capitalist, and the producers of goods. We introduce and develop an elaborate dynamic wage fund model in the context of contemporary economic theory. The modified golden rule can be derived based on a mechanism significantly different from the standard Ramsey-Cass-Koopmans optimal growth framework. We also show that, although international trade in a static setting in the wage fund framework has real asymmetric distributional effects on the welfare of the agents just like the Stolper-Samuelson theorem, those asymmetric distributional impacts are nullified in the dynamic setting. In fact, trade liberalization is Pareto improving along the balanced growth path.