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A Dynamic Model of Specialization and Market Development as Engines of Economic Growth

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  • Phillips, Kerk L.

Abstract

This paper constructs a model of growth based on Adam Smith's notions of specialization and extent of the market. We seek to explain the following stylized facts. 1) The share of household production in total output has fallen over time as the economy has grown. 2) Services as a percent of GDP have risen at the same time. In this paper growth depends on specialization of labor according to comparative advantage in production and learning-by-doing in transactions services. It is a model of sustained, but not infinite, growth. Indeed, the main point of the paper is that it is possible to build growth models that match the historic experience without relying in unbounded growth. The model can replicate the above stylized facts for reasonable annual GDP growth rates. Simulations show that inequality over the growth episode is characterized by an inverted U-shaped curve.

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File URL: http://mpra.ub.uni-muenchen.de/38248/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23500.

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Date of creation: Mar 2010
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Handle: RePEc:pra:mprapa:23500

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Keywords: growth; extent of the market; market development; specvialization;

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References

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  1. Ng, Y.K. & Yang, X., 1999. "Specialization, Information, and Growth: A Sequential Equilibrium Analysis," Papers 7, Chicago - Graduate School of Business.
  2. Yang, Xiaokai & Borland, Jeff, 1991. "A Microeconomic Mechanism for Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 460-82, June.
  3. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  4. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  5. Locay, Luis, 1990. "Economic Development and the Division of Production between Households and Markets," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 965-82, October.
  6. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  7. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-72, June.
  8. Bartolini, Stefano & Bonatti, Luigi, 2007. "Endogenous growth, decline in social capital and expansion of market activities," MPRA Paper 3341, University Library of Munich, Germany.
  9. Devereux, John & Locay, Luis, 1992. "Specialization, Household Production, and the Measurement of Economic Growth," American Economic Review, American Economic Association, vol. 82(2), pages 399-403, May.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  11. Fishman, Arthur & Simhon, Avi, 2002. " The Division of Labor, Inequality and Growth," Journal of Economic Growth, Springer, vol. 7(2), pages 117-36, June.
  12. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
  13. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
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