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Productivity, relative sectoral prices, and total factor productivity: Theory and evidence

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  • Gangopadhyay, Kausik
  • Mondal, Debasis

Abstract

This study examines the role of sectoral productivity in explaining the structural change process and relative sectoral prices in an economy. A simple two-sector general equilibrium model was developed to show that improvement in agricultural productivity relocates labor away from the agriculture sector under certain conditions. In contrast to the conventional wisdom that relative sectoral prices reflect relative sectoral productivities, this study shows the possibility of a U-shaped relationship between the two factors and found a structural break in their relationship based on the US data during 1920–1965. We estimate our model parameters by using the simulated method of moments after constructing a suitable structural model with historical data on the US economy for the previous two centuries (1820–2017). For the most plausible set of parameter values, our model could primarily replicate the relative price of farm movement and the agricultural labor share of the US economic history.

Suggested Citation

  • Gangopadhyay, Kausik & Mondal, Debasis, 2021. "Productivity, relative sectoral prices, and total factor productivity: Theory and evidence," Economic Modelling, Elsevier, vol. 100(C).
  • Handle: RePEc:eee:ecmode:v:100:y:2021:i:c:s0264999321000985
    DOI: 10.1016/j.econmod.2021.105509
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    More about this item

    Keywords

    Agricultural productivity; Structural transformation; Manufacturing productivity; Terms of trade; Simulated method of moments; Calibration; Nonfarm productivity; Multisector growth model; General equilibrium model;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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