Politicians and business leaders often make claims about why certain sectors in the economy are shrinking, such as the decline in U.S. manufacturing is due to robotics or trade with China. Such assessments are flawed, as the sectoral composition of the economy is mostly driven by preferences and not by productivity, according to a recent study that models this long-run structural change in the economy. As consumers become richer, they spend more on services such as health and education whose demand is much more income elastic, and less on agriculture and manufactured goods. Until now, productivity has often been considered at least as important, if not more, than preferences, in shaping the sectoral composition of the economy. The results are published in Econometrica.
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Source: Phys.org