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Supply Side Structural Change

  • Juan C. Cordoba

    (Rice University)

The interest rate and the rate of economic growth are often regarded as roughly constant as economies grow. Moreover, the agricultural sector and rural population typically shrink. We show that an otherwise standard growth model that includes a backward and an advanced sector can account for these regularities. The mechanism works as follows: as the economy accumulates capital, labor flows from the backward sector to the advanced one. This migration prevents the usual diminishing marginal returns of capital. As a result, the interest rate and the growth rate of the economy remain constant during the transition to the steady state. The model predicts that developed countries must experience a sudden slowdown in their growth rates once the backward sector fully disappears. Productivity, as measured by the Solow residuals, also must slow down. Cross-country evidence supports these predictions of the model

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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0211002.

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Length: 38 pages
Date of creation: 21 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpge:0211002
Note: Type of Document - pdf; pages: 38 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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