DP12387 Engel's Law in the Global Economy: Demand-induced Patterns of Structural Change, Innovation, and Trade

Author(s): Kiminori Matsuyama
Publication Date: October 2017
Keyword(s): Factor price convergence, Implicit (direct and indirect) additivity, Isoelastically nonhomothetic CES, Leapfrogging, log-supermodularity, Monotone comparative statics, The Linder effect, The Schmookler effect, Trade patterns reversal, Vernon's product cycle hypothesis
JEL(s): F62, F63, O11, O19, O33
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12387

Endogenous demand composition across sectors due to nonhomothetic demand (Engel's Law) 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) migration of industries from rich to poor countries. This paper offers a unifying perspective on how economic growth and globalization affects the patterns of structural change, innovation and trade across countries and across sectors in the presence of Engel's Law. To this end, we develop a two-country model of directed technological change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions. 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.