Economic Development and the Relative Price of Nontradables: Global Dynamics of the Krueger‐Deardorff‐Leamer Model*

Abstract

AbstractThis paper employs a three‐factor model of economic development to model forward‐looking nontraded investment as a determinant of the relative price of nontradables. A capital‐intensity. reversal of nontraded output relative to manufactured output‐arising from a switch toward a capital‐intensive manufacturing technique from a labor‐intensive technique‐produces a bifurcation in the model's dynamics. the two resulting saddlepath trajectories are each consistent with optimizing behavior and transversality conditions at infinity. History, as embodied in the economy's capital stock, as well as forward‐looking expectations determine whether the economy chooses the low‐investment or high‐investment trajectory.