Productive Consumption and Growth in Developing Countries

Abstract

Productive consumption enables the satisfaction of current needs and increases the productive potential of labor. The productive‐consumption hypothesis is of fundamental interest because it modifies the “harsh” intertemporal consumption tradeoff traditionally assumed. The incorporation of the productive‐ consumption hypothesis into a simple endogenous growth model reveals the following implications: (i) the possibility of a poverty‐trap; (ii) the rule of optimal consumption turns into a modified Keynes–Ramsey rule; (iii) the (effective) IES is based on, inter alia, the technological opportunities to enhance human capital due to productive consumption; (iv) a rising saving rate; and (v) transitional dynamics to an asymptotic balanced‐growth path.