Structural Transformation in an Open Economy
Posted: 18 Dec 2009
Date Written: December 1, 2009
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
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