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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 8: Structural economic dynamics and the final product concept

Giovanni Russo and Ronald Schettkat


8. Structural economic dynamics and the final product concept1 Giovanni Russo and Ronald Schettkat 1 INTRODUCTION The structure of employment and nominal GDP in the USA, Europe and other highly industrialized countries has changed dramatically over the last decades. During this period, manufacturing industries have declined and service industries have expanded. This structural shift is often described as de-industrialization or post-industrial society. All authors agree that both the share of services in nominal GDP and the share of services in employment has increased, but there is surprising disagreement about the nature of these changes these days. Many economists found a constant share of real service output in real GDP (Baumol, Blackman and Wolff 1989, for the USA over the period 1947 to 1976, Ramaswamy and Rowthorn 1997 for the economies of the USA, Japan, and the European Union from 1960 to 1994). Fuchs (1968) even found a decline in the share of real services in real GDP. The indisputable increase in the share of services in nominal GDP and employment is thus the effect of a constant relative demand pattern in combination with unbalanced productivity growth. Low productivity growth rates in services alongside high productivity growth rates in manufacturing led to the growth of the service industries in relative terms.2 However, for recent decades Appelbaum and Schettkat (1997) found evidence for a rising share of services in real GDP. Most of the empirical analyses are based on National Accounts Statistics, which use an institutional division of the economy. Changes in...

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