A two-sector approach to modeling U.S. NIPA data

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, in which technological progress in the production of durable goods exceeds that in the rest of the economy, provides a far better picture of the long-run behavior of the U.S. economy. The paper shows how to use the two-sector approach to model the real chain-aggregated variables currently featured in the U.S. National Income and Product Accounts. It is shown that each of the major chain-aggregates-output, consumption, investment, and capital stock-will tend in the long run to grow at steady, but different, rates. Implications for empirical analysis based on these data are explored.