Evolution of the Relative Price of Goods and Services in a Neoclassical Model of Capital Accumulation

November 1, 2004

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides an explanation for the secular increase in the price of services relative to that of manufactured goods that relies on capital accumulation rather than on an exogenous total factor productivity growth differential. The key assumptions of the two-sector, intertemporal optimizing model are relatively high capital intensity in the production of goods and limited cross-border capital mobility, allowing the interest rate to vary. With plausible parameterization, the model also predicts a decline in the employment share of the goods sector over time.

Subject: Capital accumulation, Capital productivity, Labor, Labor productivity, National accounts, Production, Total factor productivity

Keywords: accumulation equation, Balassa-Samuelson effect, Capital accumulation, capital mobility, Capital productivity, cross-border capital movement, East Asia, goods production technology, interest rate, Labor productivity, labor productivity growth, Total factor productivity, two-sector growth model, Western Europe, WP

Pages:
18
Volume:
2004
DOI:
https://doi.org/10.5089/9781451874686.001
Issue:
207
Series:
Working Paper No. 2004/207
Stock No:
WPIEA2072004
ISBN:
9781451874686
ISSN:
1018-5941

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