The Three-Sector Ramsey Model

Abstract

This chapter develops a three-sector growth model with three factors of production. One factor is specific to a sector, and one sector’s output is a home-good, meaning it is not traded in international markets. The chapter builds upon the static three-sector model developed in Chapter 2, and the two sector Ramsey model presented in the previous chapter. The dynamic three-sector model is a convenient point of departure for developing policy models with more sectoral detail, and for studying various other aspects of economic growth that have received attention at least from the time of Arthur Lewis. The seminal work of Lewis (1954), further developed by Fei and Ranis (1961) emphasize the supply of surplus labor from the farm sector to the rest of the economy as an essential part of the growth process. This theme was also emphasized in the work of Jorgenson (1967). In spite of the renewed interest in growth theory in the 1980s, Matsuyama (1992) was among the first to develop a model of endogenous growth with two distinct sectors, agriculture and manufacturing.