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Balanced growth revisited : a two-sector model of economic growth

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  • Karl Whelan

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.

Suggested Citation

  • Karl Whelan, 2000. "Balanced growth revisited : a two-sector model of economic growth," Open Access publications 10197/247, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:oapubs:10197/247
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    File URL: http://hdl.handle.net/10197/247
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    References listed on IDEAS

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    3. Tevlin, Stacey & Whelan, Karl, 2003. "Explaining the Investment Boom of the 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 1-22, February.
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    6. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-826, August.
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    Cited by:

    1. Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111, Elsevier.
    2. Das, Mitali & Hilgenstock, Benjamin, 2022. "The exposure to routinization: Labor market implications for developed and developing economies," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 99-113.
    3. Mitali Das, 2019. "Does the Exposure to Routinization Explain the Evolution of the Labor Share of Income? Evidence from Asia," ADB Institute Series on Development Economics, in: Gary Fields & Saumik Paul (ed.), Labor Income Share in Asia, chapter 0, pages 17-37, Springer.
    4. Cliff L.F. Attfield & Jonathan R.W. Temple, 2003. "Measuring trend output: how useful are the Great Ratios?," Bristol Economics Discussion Papers 03/555, School of Economics, University of Bristol, UK.
    5. Frank Schorfheide & Francis X. Diebold & Marco Del Negro, 2008. "Priors from Frequency-Domain Dummy Observations," 2008 Meeting Papers 310, Society for Economic Dynamics.
    6. Jonathan Temple & Cliff Attfield, 2004. "Measuring trend growth: how useful are the great ratios?," Money Macro and Finance (MMF) Research Group Conference 2003 101, Money Macro and Finance Research Group.

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    More about this item

    Keywords

    Balanced growth; Multisector models; Chain aggregation; Economic development--United States; Economic development--Mathematical models; Durable goods; Consumer;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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