Journal Article

ENGELS LAW IN THE GLOBAL ECONOMY: DEMAND-INDUCED PATTERNS OF STRUCTURAL CHANGE, INNOVATION, AND TRADE

Matsuyama, Kiminori

2019

Overview

Endogenous demand composition across sectors due to income elasticity differences, or Engel's Law for brevity, affects (i) sectoral compositions in employment and in value-added, (ii) variations in innovation rates and in productivity change across sectors, (iii) intersectoral patterns of trade across countries, and (iv) product cycles from rich to poor countries. Using a two-country model of directed technical change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions, this paper offers a unifying perspective on how economic growth and globalization affect the patterns of structural change, innovation, and trade across countries and across sectors in the presence of Engel's Law. Among the main messages is that globalization amplifies, instead of reducing, the power of endogenous domestic demand composition differences as a driver of structural change.

• Publisher: Econometric Society,Blackwell Publishing Ltd
• Subject: Changes / directed technical change / Dixit–Stiglitz–Krugman model of production and trade / Economic growth / Economic models / Elasticity / Employment / Endogenous / factor price convergence / Global economy / Globalization / home market effects in employment and patterns of trade / implicit additivity / Income elasticity / Innovations / International trade / Isoelastically nonhomothetic CES / Law / leapfrogging / Linder effect / log‐supermodularity / Low income groups / monotone comparative statics / monotone likelihood ratio / Power / Productivity / Schmookler effect / Structural change / terms‐of‐trade change / trade patterns reversal / Vernon's product cycle