Question

What is David Ricardo’s theory of economic growth? How is the distribution of income is tied into the rate at which the economy grows?

Answer 1

David Ricardo stated that distribution of income plays a major role in economic development. He stated that productive land is distributed between landlords, capitalists and labourers. Capitalists undertake economic development when they reinvest profits and increase capital formation. Thus the national output is distributed between three groups, which are respectively wages, rents and profits. The more distribution of income in the economy, the more is the economic growth rate of that country. He states that when wages increase, the circulating capital increases and the relative value of the commodities stays the same, this drives economic growth. He further stated that capital accumulation leads to output growth. Output is distribution between profits, wages and rent. Profits are invested while wages and rent are consumed. This profit which has been invested leads to capital accumulation which leads to output, this is what drives economic growth. Thus the distribution of income between landlords, workers and capitalists drives the economic growth.