Balanced Growth Revisited: A Two-Sector Model of Economic Growth

33 Pages Posted: 14 Feb 2001

See all articles by Karl Whelan

Karl Whelan

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Date Written: December 5, 2000

Abstract

The one-sector Solow-Ramsey model is the most popular model of long-run economic growth. This paper argues that a two-sector approach, which distinguishes the durable goods sector from the rest of the economy, provides a far better picture of the long-run behavior of the U.S. economy. Real durable goods output has consistently grown faster than the rest of the economy. Because most investment spending is on durable goods, the one-sector model's hypothesis of balanced growth, so that the real aggregates for consumption, investment, output, and the capital stock all grow at the same rate in the long run, is rejected by U.S. data. In addition, to model these aggregates as currently constructed in the U.S. National Accounts, a two-sector approach is required. Implications for empirical macroeconomics are explored.

Keywords: Balanced growth, multisector models, chain aggregation

JEL Classification: O41, O47

Suggested Citation

Whelan, Karl, Balanced Growth Revisited: A Two-Sector Model of Economic Growth (December 5, 2000). Available at SSRN: https://ssrn.com/abstract=258372 or http://dx.doi.org/10.2139/ssrn.258372

Karl Whelan (Contact Author)

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

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