The productivity growth slowdown and Kaldor’s growth facts

Abstract

The productivity growth slowdown that started in the 1970s presents a challenge to Kaldor’s growth facts and the one-sector growth model. We ask: What natural modification of the growth model can generate a prolonged productivity growth slowdown? We show that the two-sector version with separate consumption and investment sectors has a balanced growth path equilibrium along which productivity growth slows down if two conditions hold: real GDP is measured with the Fisher index; productivity growth in the consumption sector slows down. We also show that real GDP measured with the Fisher index is a welfare measure in the two-sector version.