Endogenous Growth and Changing Sectoral Composition in Advanced Economies

Giulia Felice, Department of Economics, University of Pavia

Despite the striking evidence of the changing sectoral composition in employment and output shares characterizing the growth process, structural change is usually disregarded in growth modeling. In contrast, we focus on how structural change can affect aggregate growth by presenting a two-sector model with a “progressive” industry (“manufacturing”), which exhibits an AK production function and which produce both for consumption and for investment, and a technologically “stagnant” industry (“services”), which produces only for consumption. Within this framework, we show under what conditions on preferences perpetual growth can be generated. In particular, the paper demonstrates that asymptotic stagnancy may occur when stagnant industries supply final goods or services and when preferences are non-homothetic, namely when what households spend on services tends to increase more than proportionally than their total consumption expenditure. This result confirms and gives micro-foundation to the well-known Baumol’s thesis. It is also shown that positive long-term growth is possible even when preferences are non-homothetic, if a portion large enough of what households spend on consumption at any point in time is devoted to the progressive good.
Numerical examples illustrate how the transition path displays the regularities, which appear to characterize the structural dynamics in advanced economies.

Date: 19 April-00 0000