Non-homothetic Preferences, and Preference Structure Dynamics

Abstract

This article constructs a tri-sector economic growth model that includes agriculture, manufacturing, and the service industry to investigate the process of economic structural transformation from the perspective of consumption preferences. This article views changing the preference structure as an endogenous, self-determining behavior of economic agents. As subsistence consumption increases, agriculture is affected by agricultural income and the amount of agricultural labor. As the home production of services increases, the service industry is affected by service income and technological complexity. A change in the endogenous preference structure leads to a change in the consumption structure, which, in turn, causes a change in the production structure, which creates a composite picture of economic structural change. This article analyzes the nature of structural change in a sectoral economy by characterizing the sectoral balanced growth path (SBGP) and the aggregate balanced growth path (ABGP). This article also analyzes the nature of aggregate economic growth along the generalized balanced growth path (GBGP) and thus integrates theories of economic growth and economic structural change organically.