Engel's Law in the Global Economy: Demand-Induced Patterns of Structural Change, Innovation and Trade
55 Pages Posted: 21 Feb 2018 Last revised: 7 Feb 2020
Date Written: October 18, 2017
Endogenous demand composition across sectors due to nonhomothetic demand (Engel’s Law) affects i) sectoral compositions in employment and in value-added, ii) variations in innovation rates and in productivity change across sectors, iii) intersectoral patterns of trade across countries, and iv) migration of industries from rich to poor countries. This paper offers a unifying perspective on how economic growth and globalization affect the patterns of structural change, innovation and trade across countries and across sectors in the presence of Engel’s Law. To this end, we develop a two-country model of directed technological change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions. 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 monopolistic competition, Schmookler effect, directed productivity change, home market effect, Linder effect, Vernon's product cycle hypothesis, leapfrogging
JEL Classification: F62, F63, O11, O19, O33
Suggested Citation: Suggested Citation