Two-Sector Models of Open Economies and Beyond: A Synthesis and an Empirical Application

Abstract

Some well-known two-sector models of industrial countries exhibit a crowding-out effect or relationship between the main sectors of the economy. This is true of the small open economy, traded/non-traded good model without nominal wage rigidity, and for the model of the Dutch disease. In contrast, important models of semi-industrialized countries, or even emerging markets, such as the Bose model, portray a complementary relation between the various sectors. This paper discusses a possible synthesis between these differing model specifications, and tests the applicability of these models for a large sample of industrial countries, emerging markets and developing economies by analyzing the inter-linkages in their sector growth patterns.