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The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000

  • Desmet, Klaus
  • Parente, Stephen

This paper argues that an economy's transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England's long-run development and explore how various factors affect the timing of takeoff.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7290.

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Date of creation: May 2009
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Handle: RePEc:cpr:ceprdp:7290
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