Endogenous demand composition across sectors due to income elasticity differences, or Engel's Law for brevity, affects (i) sectoral compositions in employment and in value‐added, (ii) variations in innovation rates and in productivity change across sectors, (iii) intersectoral patterns of trade across countries, and (iv) product cycles from rich to poor countries. Using a two‐country model of directed technical change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions, this paper offers a unifying perspective on how economic growth and globalization affect the patterns of structural change, innovation, and trade across countries and across sectors in the presence of Engel's Law. Among the main messages is that globalization amplifies, instead of reducing, the power of endogenous domestic demand composition differences as a driver of structural change.

This paper proposes a symmetry-breaking model of trade with a (large but) finite number of (ex ante) identical countries and a continuum of tradeable goods, which differ in their dependence on local differentiated producer services. Productivity differences across countries arise endogenously through free entry to the local service sector in each country. In any stable equilibrium, the countries sort themselves into specializing in different sets of tradeable goods, and a strict ranking of countries in per capita income, TFP, and the capital-labor ratio emerges endogenously. Furthermore, the distribution of country shares, the Lorenz curve, is unique and analytically solvable in the limit, as the number of countries grows unbounded. Using this limit as an approximation allows us to study what determines the shape of distribution, to perform various comparative statics, and to evaluate the welfare effects of trade.

This paper investigates the effects of financial market globalization on the inequality of nations. The world economy consists of inherently identical countries, which differ only in their levels of capital stock. Each country is represented by the standard overlapping generations model, modified only to incorporate credit market imperfection. An integration of financial markets affects the set of stable steady states, as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth-dependent borrowing constraint. The model is tractable enough to allow for a complete characterization of the stable steady states. In the absence of the international financial market, the world economy has a unique steady state, which is symmetric and stable. In the presence of the international financial market, symmetry-breaking occurs under some conditions. That is, the symmetric steady state loses its stability and stable asymmetric steady states come to exist. In the stable asymmetric steady states, the world economy is endogenously divided into the rich and poor countries; the borrowing constraints are binding in the poor but not in the rich; the world output is smaller, the rich are richer and the poor are poorer in any of the stable asymmetric steady states than in the (unstable) symmetric steady state.

The neoclassical growth model focuses on factor accumulation as an engine of growth, while the neo-Schumpetarian growth model stresses innovation. This paper argues that these two views of growth may capture different phases of a single growth experience. In the model presented below, the balanced growth path is unstable and the economy achieves sustainable growth through cycles under an empirically plausible condition, perpetually moving back and forth between two phases. One phase is characterized by higher output growth, higher investment, no innovation, and a competitive market structure. The other phase is characterized by lower output growth, lower investment, high innovation, and a more monopolistic market structure. Both investment and innovation are essential in sustaining growth indefinitely, and yet they move in an asynchronized way; only one of them appears to play a dominant role in each phase. The economy grows faster along the cycles than along the Zunstable. balanced growth path.

This paper demonstrates that an optimizing model of a monetary economy can produce perfect foresight equilibria in which the price level fluctuates forever. Cyclically or chaotically fluctuating equilibria are more likely to exist when the rate of money supply growth is high. Furthermore, the set of equilibrium prices may have a complicated topological structure, which poses a more serious problem concerning the validity of comparative statics method than any sort of indeterminacy previously discussed in the literature.

When do dynamic nonconvexities at the disaggregate level translate into dynamic nonconvexities at the aggregate level? We address this question in a framework where the production of differentiated intermediate inputs is subject to dynamic nonconvexities, and we show that the answer depends on the degree of Hicks-Allen complementarity Žsub-stitutability. between differentiated inputs. In our simplest model, a generalization of Judd Ž 1985. and Grossman and Helpman Ž 1991. among many others, there are dynamic nonconvexities at the aggregate level if and only if differentiated inputs are Hicks-Allen complements. We also compare dynamic equilibrium and optimal allocations in the presence of aggregate dynamic nonconvexities due to Hicks-Allen complementarities between differentiated inputs.