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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page A Two-Sector Approach to Modeling U.S. NIPA Data
Karl Whelan

Abstract: The one-sector Solow-Ramsey model is the most popular model of long-run economic growth. This paper argues that a two-sector approach, which distinguishes the durable goods sector from the rest of the economy, provides a far better picture of the long-run behavior of the U.S. economy. Real durable goods output has consistently grown faster than the rest of the economy. Because most investment spending is on durable goods, the one-sector model's hypothesis of balanced growth, so that the real aggregates for consumption, investment, output, and the capital stock all grow at the same rate in the long run, is rejected by U.S. data. In addition, to model these aggregates as currently constructed in the U.S. National Accounts, a two-sector approach is required. Implications for empirical macroeconomics are explored.

Keywords: Balanced growth, multisector models, chain aggregation

Full paper (202 KB PDF)

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Last update: May 2, 2001