School of Economics

2016 Discussion papers


School of Economics Discussion Paper 16/04


The rise of the service economy and the real
return on capital


Miguel León-Ledesma and Alessio Moro
University of Kent and University of Cagliari


May 2016

Abstract:

We use a two-sector model of structural transformation and balanced growth to show that the real interest rate, measured as the return on capital in units of GDP or in units of aggregate consumption, declines as income grows. This is due to the differential TFP growth in the goods producing sector relative to the services sector. This differential drives a relative price change that triggers a steady decline in the rate of return on capital along the growth path. We calibrate the model to U.S. data to reproduce the behavior of GDP, the share of services in consumption, the relative price goods/services and the investment/output ratio in the period 1950-2015. We find that the calibrated model displays a decline of the real interest rate of 36% in terms of units of GDP and of 43% in terms of units of aggregate consumption during the period considered.

JEL Classification:
E22; E24; E31; O41

Keywords: Structural transformation, productivity of capital, two-sector model



To download the file in pdf format click here.

 

School of Economics, Keynes College, University of Kent, Canterbury, Kent, CT2 7NP

Undergraduate enquiries: +44 (0) 1227 827497, Postgraduate enquiries: +44 (0) 1227 827440 or email us

Last Updated: 09/05/2016