Abstract

Endogenous demand composition across sectors dueto income elasticity differences, or Engel’s Law for the brevity, affects i) sectoral compositions in employment and in value-added, ii) variations ininnovation rates and in productivity change across sectors, iii) intersectoral patterns of trade across countries; and iv) product cycles from rich to poorcountries. Using a two-country model of directed technical change with acontinuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions, this paper offers a unifying perspective on how economic growth and globalization affects the patterns of structural change, innovation and trade across countries and across sectors in the presence of Engel’s Law. Among the main messages is that globalization amplifies, instead of reducing, the power of endogenous domestic demand composition differences as a driver of structural change.

Keywords

Isoelastically nonhomothetic CES, Implicit additivity, Dixit-Stiglitz-Krugman model of production and trade, Schmookler effect, Directed technical change, Home market effects in employment and patterns of trade, Linder effect, Vernon’s product cycle, Terms-of-tradechange, Factor price convergence, Leapfrogging, Trade patterns reversal, Log-supermodularity, Monotone likelihood ratio, Monotone comparative statics

Kiminori Matsuyama is a professor in the Department of Economics at Northwestern University and a member on the International Academic Advisory Council of the Institute of New Structural Economics (INSE) at Peking University. His research interests concern international trade and economic growth and development.  He is particularly interested in understanding the mechanisms behind macroeconomic instability, structural transformation, as well as inequality across countries, regions, and households. He is a Fellow of Econometric Society. He was the 1996 winner of the Nakahara Prize awarded to the best young economist by the Japanese Economic Association. He currently serves as an associate editor of the Journal of Economic Theory and the Journal of the Japanese and International Economies. He obtained his Ph.D. in Economics from Harvard University in June 1987.

Professor Matsuyama will give a guest lecture on Professor Yong Wang’s Advanced Topics in Economic Growth course. Welcome to join and audit!