ABSTRACT
This chapter provides the construction of a full general equilibrium two-sector model of the economy, bringing in income distribution and factor owner preferences in addition to production conditions as determinants of the full general equilibrium solution. The condition that the factor owners have a relative marginal preference for the commodity using their factors intensively is a necessary condition for instability and multiple equilibrium. An alternative approach to the Lerner-Pearce diagram for representing the two-sector general equilibrium model utilizes the contract-box diagram associated with the English economists Edgeworth and Bowley. The method of derivation of the transformation curve and the income distribution functions, the analysis of the general equilibrium, determination of commodity and factor prices and the production pattern can proceed without reference to either the Lerner-Pearce or the contract-box diagram. Negative production of a commodity serves in the analysis as a proxy for hiring factors of production, a technique for showing factor movement in terms of commodities.
