Progressive services, asymptotically stagnant services, and manufacturing: Growth and structural change

We present a model of structural change which, distinctively, sub-divides services (S) into ‘Progressive Services’ (PS) and ‘Asymptotically Stagnant Services’ (AS), to better reflect the advent of the New Economy. A manufacturing (M) sector is also included, and non-homothetic preferences assumed. An expanding-product-variety endogenous-growth framework is adopted, and partially overlapping input sets across the three (sub-)sectors assumed. The model endogenously generates different stages of growth: services which in due course become classified as progressive first overtake AS, and then M, in innovation-driven productivity growth, consistent with post-World-War-II US experience. The socially optimal growth pattern differs qualitatively from the private, and optimal, time-varying R&D subsidies are identified.