Two Perspectives on Preferences and Structural Transformation

We assess the empirical importance of changes in income and relative prices for structural transformation in the postwar United States. We explain two natural approaches to the data: sectors may be categories of final expenditure or value added; e. g., the service sector may be the final expenditure on services or the value added from service industries. We estimate preferences for each approach and find that with final expenditure income effects are the dominant force behind structural transformation, whereas with value-added categories price effects are more important. We show how the input-output structure of the United States can reconcile these findings.