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The Growth of Service Industries

The Paradox of Exploding Costs and Persistent Demand

Edited by Thijs ten Raa and Ronald Schettkat

Problems arise if budgets for services are held constant whilst prices rise. Education, cultural activities and health services are under constant budgetary pressure. The authors argue that the price of commodities is linked to demand and price increases would therefore seem to threaten the very existence of these services. The paradox of these services is that in spite of their exploding costs, demand persists.
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Chapter 2: Potential explanations of the real share maintenance of the services

Thijs ten Raa and Ronald Schettkat


Thijs ten Raa and Ronald Schettkat 1 INTRODUCTION The problem of the services is that productivity growth is low compared to that in industry. We may thus expect that services become expensive relative to manufactured goods and, therefore, price themselves out of the market. Surprisingly, at least to narrow-minded economists such as us, this does not happen. The share of the services in advanced economies is stable, or even growing. And this is not just a price effect. In other words, modern economies do not depict a shrinking real share of the services which is constant in dollars because of the ever increasing price of services. No, the real share itself is also stable. And because of the price increase, services consume ever increasing shares of our budgets. The purpose of this chapter is to understand the issue in terms of a model. The model will be simple yet rich enough to clarify conceptual issues and to identify potential explanations. The conceptual issues are the appropriate measures of productivity growth and real shares. We will argue that instead of measuring the growth of productivity in terms of output per worker, it is better to use the concept of total factor productivity (TFP) growth. We will also argue that instead of measuring the service share as a percentage of national income, it is better to take it as a percentage of the national product. And yes, it makes a difference, even though national income and national product are equal! Services constitute...

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