A MODEL OF TRADE AND GROWTH WITH A NONTRADED SERVICE SECTOR

This paper incorporates a non-traded service sector into an otherwise neoclassical model of trade and growth. Our model can explain why the relative price of services, the expenditure share of services, and the employment share of the service sector all tend to rise with the level of per capita income, which is determined, in the long run, by the ratio of the saving rate to the rate of labour growth and the level of labour-augmenting technical progress. We also find that a rich country with a high level of technical progress, ceteris paribus, has comparative advantage in producing capital-intensive goods.