that are used to produce final consumption expenditure. In order to obtain value added shares one would have to use (inverse) input–output relationships to unbundle the final consumption expenditure into its value added components. Moreover, since n it now reflects all of the labor that went into producing the shirt at each of the various stages of production, it is no longer the case either that n it is an appropriate measure of the employment share of sector i in period t . The bottom line from this discussion is that if one wants to have a model that can simulta- neously address the shares of sectoral employment, value added, and consumption expenditure, then one will need to explicitly include the details of the input–output structure involved in transforming sectoral value added into sectoral consumption expenditure. We have chosen not to do this in order to preserve a greater degree of transparency in the presentation. In view of this, we need to keep in mind that when we discuss the model implications for the mea- sures of structural transformation, we can either connect the production measures (employment shares and value added shares) to the data, implying that the consumption measure (consump- tion expenditure shares) does not have a close empirical counterpart, or we can connect the consumption measure to the data implying that the two production measures do not have close empirical counterparts. Whichever way we choose, our model will not be able to make state- ments about all three measures of structural transformation at the same time. Moreover, as we 37
discuss later on in more detail, one should not assume that preference and technology parame- ters are invariant to the interpretation that one imposes on the model objects. 4 The Economic Forces Behind Structural Transformation: Theoretical Analysis The Kaldor facts regarding balanced growth over long periods of time have led the profession to focus on specifications of the one–sector neoclassical growth model that generate balanced growth. The evidence that we presented in Section 2 suggests that the continuing process of re- allocation of activity across sectors coexists with the stable behavior of aggregate variables that characterizes balanced growth. It is therefore perhaps not surprising that the theoretical litera- ture on structural transformation has looked for specifications of the previous model that give rise to a generalized balanced growth path along which structural transformation occurs. We begin this section by summarizing the results of this theoretical literature and its predictions for the nature of structural transformation. We close this section with a discussion of whether the focus on specifications that deliver exact balanced growth might be too stringent. Irrespective of whether this is the case, we believe that the search for specifications that deliver balanced growth and structural transformation has proven useful in helping researchers isolate various forces that are potentially important in shaping structural transformation.
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