An analysis of a disaggregated structural change model for the US economy in the post-Second World War period. The results reveal that the positive correlation between the relative price and the relative quantity of services with respect to goods, which challenges the commonly used constant elasticity of substitution (CES) preferences in the structural change literature, largely reflects the heterogeneous makeup of the services sector. The research demonstrates that a preference specification that separates service industries with high productivity growth (progressive services) from the rest of the services can account for this positive correlation without any income effects. Consistent with developmental facts, the disaggregated structural change model being considered indicates a hump for the relative price of investment. Regarding structural change in investment, the results of the disaggregated model differ from the existing literature. Specifically, the price of services relative to goods declines over time, and the rise of the services sector in investment reflects the substitutability between goods and services.
Author: Ali Sen (University of Cambridge)
