Stuctural transformation in general equilibrium

Models of structural change in general equilibrium are commonly used to address a number of questions regarding the behaviour of the macro-economy. In this paper, we first revise the main mechanisms at work in generating structural change in a multi-sector environment. These effects emerge due to both an interaction between consumers' preferences and technological change and to different income elasticities of the various goods and services entering the utility function. Next, we address the issue of measurement of these models when comparing them to the data. The typical assumption in multi-sector models is to define GDP as aggregate output in units of a numeraire good, often chosen to be the investment good. However, this procedure is equivalent to deriving nominal GDP in the data (i.e. total output of the economy in units of one particular good), and not to deriving a measure of real GDP. We then discuss how GDP in the model should be measured to provide a statistic that is comparable with the data in national accounts. The last part of the paper is devoted to show how structural transformation from manufacturing to services, when appropriately compared to the data, generates a decline in GDP growth and volatility along the growth path of an economy.

JEL Classification: C67, C68, E25, E32

Keywords: Structural Change, Growth, Volatility