Growth, Sectoral Composition, and the Wealth of Nations

We characterize the dynamic equilibrium of a two-sector endogenous growth model with constant returns to scale. We assume that both sectors produce consumption and investment goods, and we introduce a minimum consumption requirement. In this model, economies with the same fundamentals but different endowments of capitals will converge to a common growth rate, although the long run level and sectoral composition of GDP will be different. Because total factor productivity depends on sectoral composition, capital endowments will also contribute to GDP by means of changing the sectoral composition. This suggests that the development accounting exercises should consider the endogeneity of total factor productivity when measuring the contribution of capital to GDP. Along the transition, the slope of the policy functions depends on the initial values of the capital stocks and of the minimum consumption requirement. This implies that the minimum consumption is a barrier to development and that economies initially similar may diverge along the transition.