Structural Change and Economic Growth

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Aoki M.and H.Yoshikawa, "Demand Saturation / Creation and Economic Growth" forthcoming in Journal of Economic Behavior and Organization presents a new model of economic growth.In the standard literature, the fundamental factor to restrain economic growth is diminishing returns to capital in production or R＆D technology. This paper presents a model in which the factor to restrain growth is saturation of demand for individual consumption good. The economy revives growth by the introduction of new products/industries. The new products/industries creates high growth of demand. By so doing, it elicits capital accumulation, and ultimately sustains economic growth. The model demonstrates the importance of demand creating innovations which are different from the standard measure of technical progress, namely total factor productivity.The Aoki/Yoshikawa model shows that economic growth is closely linked to changes in industrial structure. We explored this relationship for Japan, the U.S.and Germany. For Japan, we found a positive relationship between growth rate and a size of changes in industrial structure. In contrast, for the postwar U.S.no such positive relationship was found. However, we found a positive relationship for the prewar U.S.data. Our results suggest that for the 'young' economies, high growth tends to be accompanied by changes in industrial structure, while for the 'mature' economies, there is no such relationship. We plan to study the implications of our results for the 'convergence' controversy.