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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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    Cited by:

    1. 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.
    2. 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.

    More about this item

    Keywords

    Engel's Law; Growth; Investment Rates;

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