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Aggregate Elasticity of Substitution and Economic Growth: A Synthesis

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  • Jianpo Xue
  • Chong K. Yip

Abstract

This paper examines the relation between aggregate elasticity of substitution (AES) and capital accumulation (the AES-K relation) in a general multi-sector Solow growth model with all CES production technologies. There are two intermediate goods produced by capital and labor, while the final good is produced by combining the two intermediate goods. When capital is sector-specific, then it is found that a positive AES-K relation emerges ony if the elasticity of substitution (ES) between capital and labor is of the same sign as the ES between the inter-mediate goods, but with the latter having a larger magnitude as required by the restriction of capital-skill complementarity. We also introduce the concepts of "global" versus "local" AES-capital relation and highlight that the AES findings of the existing literature are local ones. The general conclusion of our analysis is that capital mobility is an important factor for the likelihood of a positive AES-K relation.

Suggested Citation

  • Jianpo Xue & Chong K. Yip, 2012. "Aggregate Elasticity of Substitution and Economic Growth: A Synthesis," DEGIT Conference Papers c017_011, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c017_011
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    Cited by:

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    2. Wymer, Clifford R. & Saltari, Enrico & Federici, Daniela, 2019. "Endogenizing The Ict Sector: A Multisector Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 23(S1), pages 25-58, September.
    3. Zha, Donglan & Kavuri, Anil Savio & Si, Songjian, 2018. "Energy-biased technical change in the Chinese industrial sector with CES production functions," Energy, Elsevier, vol. 148(C), pages 896-903.
    4. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    5. Kemnitz, Alexander & Knoblach, Michael, 2020. "Endogenous sigma-augmenting technological change: An R&D-based approach," CEPIE Working Papers 02/20, Technische Universität Dresden, Center of Public and International Economics (CEPIE).

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    More about this item

    Keywords

    Aggregate elasticity of substitution (AES); Normalized CES production function; Global and local AES-capital relations.;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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