Seeds of Growth? Agricultural Productivity and the Transitional Dynamics of the Ramsey Model
Posted: 29 Feb 2008
Date Written: June 2005
A two-sector Ramsey-type model of growth is developed to investigate the relationship between agricultural productivity and economy-wide growth. The framework takes into account the peculiarities of agriculture both in production (reliance on a fixed natural resource base) and in consumption (life-sustaining role and low income elasticity of food demand). The transitional dynamics of the model establish that when preferences respect Engel`s law, the level and growth rate of agricultural productivity influence the speed of capital accumulation. A calibration exercise shows that a small difference in agricultural productivity has drastic implications for the rate and pattern of growth of the economy. Hence, low agricultural productivity can form a bottleneck limiting growth, because high food prices result in a low saving rate.
Keywords: O11, O41
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