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STRUCTURAL CHANGE IN A SMALL OPEN ECONOMY: AN APPLICATION TO SOUTH KOREA
Author(s) -
MaO RUI,
YAO YANG
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2011.00570.x
Subject(s) - economics , productivity , structural change , agriculture , manufacturing sector , tertiary sector of the economy , differential (mechanical device) , small open economy , general equilibrium theory , open economy , aggregate (composite) , manufacturing , economy , macroeconomics , business , ecology , materials science , marketing , exchange rate , engineering , composite material , biology , aerospace engineering
This paper develops a dynamic general equilibrium model and studies structural change in a small open economy with two tradable sectors, agriculture and manufacturing, and a non‐tradable sector, services. In addition to obtaining results for a falling employment share of agriculture and a rising share of services, we demonstrate analytically the hump‐shaped share of manufacturing by identifying two countervailing effects: the productivity effect and the Balassa–Samuelson effect. The first effect, arising from differential rates of productivity growth among sectors, increases the share of manufacturing; the second effect, together with low rates of substitution between products, enhances the service sector and eventually draws labour from the manufacturing sector. At the aggregate level, however, the economy maintains a constant rate of growth. We calibrate the model with data from South Korea and find that the calibration fits the country's historical path of structural change.