The Aggregate Production Function and the Measurement of Technical Change
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The Aggregate Production Function and the Measurement of Technical Change

‘Not Even Wrong’

Jesus Felipe and John S.L. McCombie

This authoritative and stimulating book represents a fundamental critique of the aggregate production function, a concept widely used in macroeconomics.
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Chapter 8: Some problems with the neoclassical dual- sector growth model

Jesus Felipe and John S.L. McCombie

Extract

In a seminal article, ‘On Exports and Economic Growth’, Feder (1982) attempted to develop a two-sector model of economic growth. He extended the neoclassical production function approach explicitly to allow for a dual economy (namely, exports and the ‘rest of the economy’) in the less developed countries (LDCs). This approach was later extended by others to include additional sectors, including defence and government services and the model was also applied to the advanced countries (ACs). Here we extend and develop an argument first noted by Sheehey (1990). It is shown that these models are deeply flawed and cannot support the interpretation placed upon them. It will come as no surprise that the problem of identities crops up again. Feder started from the observation that there is often a close correlation between the growth of GDP and exports, which he interpreted as the latter causing the former.

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