The rate of profit and balance-of-payments-constrained economic growth: the dynamic model for a small and open economy

This paper attempts to emphasize the role of the rate of profit on the balance of payments by integrating the Marxian rate of profit with the post-Keynesian balance-of-payments-constrained growth model (Thirlwall’s Law). In this regard, the domestic rate of profit determines the direction of foreign capital, while foreign capital, in turn, influences the rate of profit. The dynamic model between the level of GDP, derived from the extended Thirlwall’s law (Thirlwall and Hussain 1982), and the rate of profit is thus created. The theoretical result obtained from the model is compatible with the stylized facts of many small and open economies that experienced rapid economic growth and balance of payments crises from the mobility of foreign capital.