The Rise of Services and Balanced Growth in Theory and Data

We investigate the effect of structural transformation on the process of economic growth. Using a two-sector growth model we show that, in addition to Baumol’s cost disease, structural transformation from goods to services generates other predictions that are in line with cross-country growth facts: an increase in the real investment rate, a decline in the real interest rate and the marginal product of capital and an acceleration of investment-specific technological change as the share of services increases. The model calibrated to U.S. data can account for the elasticity of real investment rates to the share of services measured in cross-country data.