Structural Transformation in General Equilibrium

Abstract

This chapter revises the main mechanisms at work in generating structural change in a multi-sector environment, which emerge due to an interaction between consumers’ preferences and technological change and to different income elasticities of goods and services. The chapter further discusses the issue of measurement. The typical assumption in multi-sector models is to define GDP as aggregate output in units of a numeraire good, often chosen to be the investment good. However, this procedure is equivalent to deriving nominal GDP in the data and does not provide a measure of real GDP. We then discuss how GDP in the model should be measured to provide a statistic that is comparable with the data in national accounts. The last part of the chapter shows how structural transformation from manufacturing to services, when appropriately compared to the data, generates a decline in GDP growth and volatility along the growth path of an economy.