Structural Transformations with Long-Run Price and Income Effects

We present a multi-sector model of growth that accommodates long-run real income effects and sectoral price trends. Consistent with post-war data from OECD countries, our model generates constant aggregate growth rates, constant interest rates and non-constant sectoral expenditure shares (non-homothetic Engel curves). Our model is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing and the rise of services both in nominal and real terms. We estimate the demand system derived from the model --which takes a simple log-linear form-- using historical data on sectoral shares from 30 different countries and household survey data. We show that our model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies in the post-war period.