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Theoretical Model

Manufacturing products, and services. In addition, assume that production in these sectors is determined by Cobb-Douglas production functions. The factor inputs in the primary sector (A) are natural endowments (L), including land, and labor (NA). The factor input in the service sector (S) is assumed to be labor (NS) only. The factor inputs in the manufacturing sector (M) are assumed to be capital (K) and labor (NM). The production functions for the three sectors thus are given byIn the equations above, ΩA, ΩS, and ΩM represent total factor productivity (TFP) in each sector. For the sake of simplicity, let us assume that ΩA and ΩS do not change over time, but ΩM increases. Further, we assume that L is constant over time and K is given in the short run. The markets for all outputs and production factors are assumed to be perfectly competitive. Of the three product categories, primary and manufacturing products are assumed to be traded goods, and the same goods are produced both at home and abroad. We assume that the home country is relatively small and the relative price of primary products in terms of manufacturing products, PA, is determined in the world market and the country is a price taker. We use manufacturing products of this country as the numeraire and set the price level equal to one. While the country can affect domestic prices by introducing tariffs and subsidies so that they differ from international prices, we will leave examining the impact of foreign trade policies on equilibrium real exchange rates until later. Next, given that the marginal product of labor in the service sector is assumed to be constant, we can express the output price of the service sector, PS, by w/ΩS, where w is the wage rate in terms of manufacturing products as the numeraire and ΩS is TFP.  The expenditure shares of primary products, manufacturing products, and service products, γA, γM, and γS, are constant and identical across domestic consumption, private investment, and government expenditure. Under these assumptions, the price index for domestic expenditure can be defined as SASASASAwPPPP

 As we will discuss later, a country grows rich as it accumulates capital (K) and manufacturing sector TFP (ΩM). In an economy like China’s, at a relatively early stage of economic development, there is likely to be surplus labor in the primary sector, providing sufficient cheap labor for the manufacturing sector. Following Lewis (1954, 1958, 1979), we model this situation by assuming that because of the existence of surplus labor in the primary sector, the marginal product of labor in this sector is below the subsistence level, and the wage rate is set at the minimum subsistence level, ω,5 which is higher than the marginal product of labor in the primary sector. With the real wage rate given by w/P, a Lewis-type situation can be expressed as follows: If                                                   5 With regard to whether China’s agricultur本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。