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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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    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. 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..
    3. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    4. Young, Alwyn, 1993. "Invention and Bounded Learning by Doing," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 443-472, June.
    5. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    6. 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.
    7. Fishman, Arthur & Simhon, Avi, 2002. "The Division of Labor, Inequality and Growth," Journal of Economic Growth, Springer, vol. 7(2), pages 117-136, June.
    8. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    9. Bartolini, Stefano & Bonatti, Luigi, 2008. "Endogenous growth, decline in social capital and expansion of market activities," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 917-926, September.
    10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    11. 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..
    12. 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.
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    15. 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..
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    More about this item

    Keywords

    growth; extent of the market; market development; specvialization;
    All these keywords.

    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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