Edited by Paolo Onofri
Masanao Aoki and Hiroshi Yoshikawa* 1. INTRODUCTION In the standard literature, the fundamental factor restraining economic growth is diminishing returns to capital in production or research and development (R&D) technology. In this chapter, we present a model suggesting that ‘saturation of demand’ is another important factor restraining growth. In the less mathematical literature and casual discussions, the idea of ‘demand saturation’ has been very popular. Every business person would acknowledge saturation of demand for an individual product. In fact, plot a time series of production of any representative product such as steel and automobiles, or production in any industry, against year, and, with few exceptions, one obtains an S-shaped curve. Figure 4.1, from Rostow (1978), demonstrates this ‘stylized fact’. The experiences of diﬀusion of such consumer durables as refrigerators, television sets, cars and personal computers tell us that deceleration of growth comes mainly from saturation of demand rather than diminishing returns in technology. Growth of production of a commodity or in an individual industry is bound to slow down because demand grows fast at the early stage but eventually, necessarily slows down. Thus the demand for some products grows much more rapidly than the gross domestic product (GDP), while the demand for others grows much more slowly. Products/industries face diﬀerent income elasticities of demand. The celebrated Engel’s law, based on saturation of demand for food, is merely an example. Unfortunately, the existing literature on growth abstracts largely from this important fact that products/industries obey the law of...
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