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

See all articles by Kiminori Matsuyama

Kiminori Matsuyama

Northwestern University - Department of Economics

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Date Written: October 18, 2017

Abstract

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

Matsuyama, Kiminori, Engel's Law in the Global Economy: Demand-Induced Patterns of Structural Change, Innovation and Trade (October 18, 2017). Global Poverty Research Lab Working Paper No. 17-110, Available at SSRN: https://ssrn.com/abstract=3126940 or http://dx.doi.org/10.2139/ssrn.3126940

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Northwestern University - Department of Economics ( email )

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