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A Dynamic Model of Specialization and Market Development as Engines of Economic Growth

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  • Phillips, Kerk L.

Abstract

This paper constructs a model of growth based on Adam Smith's notions of specialization and extent of the market. We seek to explain the following stylized facts. 1) The share of household production in total output has fallen over time as the economy has grown. 2) Services as a percent of GDP have risen at the same time. In this paper growth depends on specialization of labor according to comparative advantage in production and learning-by-doing in transactions services. It is a model of sustained, but not infinite, growth. Indeed, the main point of the paper is that it is possible to build growth models that match the historic experience without relying in unbounded growth. The model can replicate the above stylized facts for reasonable annual GDP growth rates. Simulations show that inequality over the growth episode is characterized by an inverted U-shaped curve.

Suggested Citation

  • Phillips, Kerk L., 2010. "A Dynamic Model of Specialization and Market Development as Engines of Economic Growth," MPRA Paper 23500, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23500
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    File URL: https://mpra.ub.uni-muenchen.de/38248/1/MPRA_paper_38248.pdf
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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    4. Yew-Kwang Ng & Xiaokai Yang, 2005. "Specialization, Information, And Growth: A Sequential Equilibrium Analysis," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 20, pages 447-474 World Scientific Publishing Co. Pte. Ltd..
    5. Xiaokai Yang & Jeff Borland, 2005. "A Microeconomic Mechanism For Economic Growth," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 18, pages 409-436 World Scientific Publishing Co. Pte. Ltd..
    6. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-472, June.
    7. Devereux, John & Locay, Luis, 1992. "Specialization, Household Production, and the Measurement of Economic Growth," American Economic Review, American Economic Association, vol. 82(2), pages 399-403, May.
    8. Locay, Luis, 1990. "Economic Development and the Division of Production between Households and Markets," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 965-982, October.
    9. Fishman, Arthur & Simhon, Avi, 2002. "The Division of Labor, Inequality and Growth," Journal of Economic Growth, Springer, vol. 7(2), pages 117-136, June.
    10. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    11. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
    12. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-1091, December.
    13. Bartolini, Stefano & Bonatti, Luigi, 2007. "Endogenous growth, decline in social capital and expansion of market activities," MPRA Paper 3341, University Library of Munich, Germany.
    14. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    More about this item

    Keywords

    growth; extent of the market; market development; specvialization;

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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