Structural Transformation in an Open Economy

Posted: 18 Dec 2009

See all articles by Kei-Mu Yi

Kei-Mu Yi

University of Houston - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Jing Zhang

University of Michigan at Ann Arbor

Date Written: December 1, 2009

Abstract

We employ a tractable dynamic, three-sector model to investigate the role of openness to trade and of other forces in structural transformation. A core feature of the model is an endogenous pattern of trade, dictated by comparative advantage, between and within sectors. An equilibrium condition of the model leads to an intuitive expression linking sectoral employment shares to sectoral expenditure shares and to the sector's net export share of total GDP. Under a low elasticity of substitution between sectors, we show how two sets of forces - biased sectoral productivity growth and declining costs of trade - can generate the 'hump' pattern that characterizes the manufacturing employment share as a country develops. In particular, we demonstrate that for the empirically relevant case of high manufacturing productivity growth, it is still possible for the manufacturing employment share to grow.

Keywords: Structural transformation, structural change, Ricardian trade

Suggested Citation

Yi, Kei-Mu and Zhang, Jing, Structural Transformation in an Open Economy (December 1, 2009). Available at SSRN: https://ssrn.com/abstract=1525508

Kei-Mu Yi

University of Houston - Department of Economics

Houston, TX 77204-5882
United States

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Jing Zhang (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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