Structural Change in Investment and Consumption: A Unified Approach

Abstract

Existing models of structural change typically assume that all of investment is produced in manufacturing. This assumption is strongly counterfactual: in the postwar US, the share of services value added in investment expenditure has been steadily growing and it now exceeds 0.5. We build a new model, which takes a unified approach to structural change in investment and consumption. Our unified approach leads to three new insights: technological change is endogenously investment specific; having constant TFP growth in all sectors is inconsistent with structural change and aggregate balanced growth occurring jointly; the sector with the slowest TFP growth absorbs all resources asymptotically. We also provide empirical support from the postwar US for the first and third insight.