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Non-homothetic preferences and growth

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  • Cristina Echevarria

Abstract

We observe that countries at low levels of income invest at lower rates than those at higher levels of income. This paper explains this fact as a consequence of Engel's law, i.e. that there is an inverse relation between expenditure and its proportion spent on food. It introduces non-homothetic preferences based on Engel's law in a simple Solow model. These preferences imply rates of net investment that increase with the level of income as we approach the steady state. Increasing investment rates imply a positive correlation between growth rates and the level of income, at low levels of income, rather than an inverse relation, as the usual Solow model implies. The existence of a positive correlation between income growth rates and income levels, at low levels of income in the presence of this type of preference, has already been shown in a previous paper for a closed economy. The purpose of this paper is to show that this positive correlation persists when we introduce trade into the model.

Suggested Citation

  • Cristina Echevarria, 2001. "Non-homothetic preferences and growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(2), pages 151-171.
    • Handle: RePEc:taf:jitecd:v:9:y:2001:i:2:p:151-171
    DOI: 10.1080/09638190050028153
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    References listed on IDEAS

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    1. Piyabha Kongsamut & Sergio Rebelo & Danyang Xie, 2001. "Beyond Balanced Growth," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 869-882.
    2. Ruttan, Vernon W., 1987. "Induced innovation and agricultural development," Food Policy, Elsevier, vol. 12(3), pages 196-216, August.
    3. Ruttan, Vernon W. & Hayami, Yujiro, 1971. "Technology Transfer And Agricultural Development," Staff Papers 13993, University of Minnesota, Department of Applied Economics.
    4. F. J. M. Meyer-zu-Schlochtern, 1988. "An International Sectoral Data Base for Thirteen OECD Countries," OECD Economics Department Working Papers 57, OECD Publishing.
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    Cited by:

    1. Trevor Tombe, 2010. "The Missing Food Problem: How Low Agricultural Imports Contribute to International Income and Productivity Differences," Working Papers tecipa-416, University of Toronto, Department of Economics.
    2. E. Cristina Echevarria, 2008. "International trade and the sectoral composition of production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 192-206, January.

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