A paper by Professor Miguel leon-Ledesma (University of Kent) with Alessio Moro (University of Cagliari) entitled ‘The Rise of Services and Balanced Growth in Theory and Data’ is due to appear in the American Economic Journal: Macroeconomics, a leading journal in macroeconomics.
Cross country data shows that real investment rates increase with income and the rate at which the relative price of investment falls accelerates as countries get richer. The paper shows that this can be quantitatively explained by the increase in the share of services in consumption expenditure. They show that a model that fits the US experience in the past 60 years is able to mimic the behaviour of these cross-country variables very well. They also show that, despite the model displaying what is commonly known as ‘balanced growth’, when we measure the model as in National Accounts, it generates non-balanced growth in the data.