Non-Homothetic Multisector Growth Models

Bjarne S. Jensen, Ulla Lehmijoki and Elena Rovenskaya

Review of Development Economics, 2015, vol. 19, issue 2, 221-243

Abstract: Multisector growth (MSG) models are dynamic versions of computable general equilibrium (CGE) models. Non-homothetic preference (utility) functions are required for the evolution of factor allocations and industrial structures in accordance with consumption expenditure patterns implied by the non-unitary income elasticities observed in all budget data since Engel in the 1850s. But comparative static general equilibrium solutions and particularly solving the dynamics of MSG models require explicit specifications of all demand and cost (price) functions. On the demand side, the constant differences of elasticity of substitution (CDES) non-homothetic indirect utility functions and Roy's identity provide the explicit Marshallian demand functions and budget shares. Sectorial constant elasticity of substitution (CES) cost functions and Shephard's lemma provide the explicit relative commodity price functions and the sectorial cost shares and capital–labor ratios. Walrasian equilibria are given by one equation and the multisector dynamics by three differential equations. Benchmark solutions are given for three cost regimes of a 10-sector MSG model. History patterns of industrial/allocational evolutions are recognized.

Date: 2015
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