Modern Economy, 2011, 2, 301-307
doi:10.4236/me.2011.23033 Published Online July 2011 (
Copyright © 2011 SciRes. ME
Economic Growth and Business Cycles: The Labor Supply
Decision with Two Types of Technological Progress
Philip E. Graves
Department of Economics, University of Colorado Boulder, Boulder, USA
Received February 7, 2011; revised April 2, 2011; accepted April 16, 2011
An informal model is described that leads to multiple macroeconomic equilibria as a consequence of random
variation in the relative amounts of technological change for new and existing goods. The novel observation
is that the rate of introduction and market penetration of new goods (sometimes called product innovation)
vis-à-vis technological advance for existing goods (sometimes called process innovation) importantly affects
the labor supply decision. A relatively rapid influx of new goods will generally increase labor supply, while
relatively more technological advance for existing goods will reduce labor supply to the market. These im-
pacts are seen to provide insights into Rostow’s stages of growth. Short run variations in the relative impor-
tance of the two types of technological change are seen to imply unpredictable business cycle behavior of the
type we observe. The welfare implications of national income accounting that fails to consider changes in
leisure are discussed.
Keywords: Labor Supply, Macroeconomics, Business Cycles, Technological Change, New Goods Versus
Existing Goods, National Income Accounting
1. Introduction
Much has been written about the development/growth
process, with few economists, from Adam Smith on
completely ignoring the issue. The field has, however,
always been a murky swirl of many disciplines (anthro-
pology, economics, history, political science, sociology,
and others) with frequent strong doses of liberal or con-
servative ideology stirred in.
Here the impact of goods variety and two types of
technological change is examined on household labor
supply decisions. Labor supply decisions, in turn, are
shown to have important impacts on both growth and the
business cycle in a closed economy. The exercise pro-
vides an attempt to explain the following central stylized
facts: First, some countries have fairly high incomes, yet
are not fully “developed” in the broad-based sense of that
term (e.g. as expressed in the rationale for the U.N.’s
Human Development Index). Second, some countries
have experienced virtually no real income growth or de-
velopment, while others suddenly “take off” in the
Rostow sense, and yet others settle into the lower growth
rates of the “mature economy” (Rostow [1])1, Finally,
the development and growth process is not smooth but
rather appears to involve irregular cycles about the
growth path, regardless of a country’s stage on that
Early models in the Solow [2] and Swan [3] tradition
treated growth in labor, knowledge, and the savings rate
as exogenous (see D. Romer [4] for a detailed survey of
growth and business cycle models). More sophisticated
models in this vein examine the implications of over-
lapping generations, effects of government purchases and
associated financing issues, but most importantly for
present purposes, endogenize the savings rate as stem-
ming from the interaction of maximizing households and
firms in competitive markets2. A problem with these ap-
proaches is that “capital accumulation cannot account for
a large part of either long-run growth or cross-country
income differences” (D. Romer, p. 95). This leaves Ro-
mer’s so-called “mystery variable”, the effectiveness of
1There are, of course many potential reasons for the text phenomena,
including security of property rights, infrastructure variation, cultural
or religious beliefs, corruption, inflation, and so on. That discussion o
these causative factors is suppressed here is not to deny their impor-
2See Diamond [5], Cass [6], Koopmans [7] and the early work of Ram-
sey [8].
Copyright © 2011 SciRes. ME
labor, “whose exact meaning is not specified and whose
behavior is taken as exogenous” (Ibid.).
The “new growth theory” attempts to put structure on
the effectiveness of labor variable by a) explicitly attrib-
uting it to knowledge and b) modeling its evolution over
time. The allocation of resources toward knowledge ac-
cumulation (in its public good nature) is endogenized
and broader interpretations of capital (to include human
capital of a private good nature) are examined3.
The present effort, unlike existing models that employ
homogeneous output, focuses on how labor supply is
affected by technological advances that lower the costs
of existing goods vis-à-vis those that result in new goods.
Section 2 discusses the nature of consumption, arguing
that in the dynamic development/growth setting, tradi-
tional views of the role of income and interest rates are
given undue causative importance, relative to household
desires for the ever-increasing variety of goods available
that drive consumption and (endogenous) income gen-
eration. In Section 3 the role that differential rates of
technological advance for existing goods and for new
goods play is discussed prior to turning to implications
for growth and fluctuations in Section IV. Issues of sys-
tematic bias in GDP as a measure of welfare, due to
varying relative patterns of technological advance, are
also discussed briefly in Section 4. Section 5 summarizes
the paper, providing suggestions for further work.
2. On the Nature of Consumption
What determines desired consumption? With unchanging
technology, perfect information, and perfect mobility one
would expect the real interest rate to determine the allo-
cation of the representative agent’s consumption among
periods. In such a classical world, income would not de-
termine consumption, because market clearing would
imply that we would always be at full employment in-
come. In a Keynesian setting, and in many growth mod-
els, consumption is taken to be a function of income
(exogenously in the fixed savings rates of the traditional
growth models, endogenously, though in a way unrelated
to the present discussion, in the new growth theory).
Yet it should be apparent clear that consumption and
income are jointly endogenous—we work to get the
things we want, hence the generation of income is de-
pendent on the nature and number of the goods available4.
Economists have tended, largely as a result of mathe-
matical convenience, to view the number of goods in an
economy as principally a mere matter of vector length or
the range of an index, i = 1,, n. To be sure, a differ-
ence in going from a two-good world of substitutes to a
three-good world has received emphasis. Moreover, it is
commonly observed that having a bigger choice set must
enable utility to rise or at least stay the same, since peo-
ple will only buy newly available goods if they “crowd
out” goods of lower utility.
But, the nature and number of goods in a society has
greater importance than suggested by such formalisms.
When comparing a developing country with a developed
country, the greater variety of goods in the developed
country affects both labor supply in the short run and
human capital augmentation in the long run. Households
in developed countries will tend to have the same (or quite
similar) goods as predominate in a developing country
plus a vast amount of other goods that are generally un-
available to households in the developing country5.
The failure to fully examine the implications of the
number of goods available, both within a country over
time and in comparisons among countries, omits insights
into the development process that are seen here to be
potentially important.
Consider first the addition of a desirable new good
from a traditional household utility maximization per-
spective. A new good raises total utility, from the same
resources, as people substitute away from now relatively
low-value marginal units of pre-existing goods toward
marginal units of the new good, until a new, utility-
maximizing equilibrium is re-established, at higher mar-
ginal utilities for all goods consumed. To clarify the na-
ture of the argument with a simple example, consider a
closed economy of homogeneous individuals in an initial
two-good world, with X representing the existing good
and L representing leisure. All goods are produced, for
simplicity, under cost conditions of the usual sort (sup-
pressed in the model discussion). Suppose that utility is
3See Lucas [9], Stokey [10], P. Romer [11], Grossman and Helpman
[12], Aghion and Howitt [13], Mankiw, D. Romer and Weil [14],
Greenwood and Uysal [15], Bilbiie, Ghironi and Melitz [16], Canova
and Lopez-Salido[17], and others for further detail. Most of these do
not endogenize labor supply in a way at all related to the present effort,
and while the work of Canova and Lopez is most similar, their focus is
on neutral and investment-specific technology shocks, rather than upon
new goods and existing goods technology shocks.
4See Graves [18] (and to a lesser extent Flores and Graves [19] which
endogenizes the labor/leisure decision) for papers emphasizing this
oint in the context of public goods provision. The point, in brief, is
that the “given” initial income, from which aggregated marginal will-
ingness to pay is taken to provide the demand side of optimal public
goods provision, is itself non-optimally low because the inability to
individually buy public goods will result in failure to generate the
optimal (larger) level of income. Hence, the traditional benefit-cos
approach to optimal public goods provision will under-provide public
5It is, of course, possible that the new good will expand (and/or alte
the relative values of elements of) the vector of valuable resources in
an economy as well (e.g. optical fiber in communications lowering the
value of copper).
Copyright © 2011 SciRes. ME
With a given level of resources in this economy, there
will be an initial maximum level of utility, U0, at the op-
timal goods-leisure bundle. Now, introduce Z, a new
good into this economy:
Presuming that the new good does not involve any re-
source discoveries, resources will be drawn from the
original two goods to supply the demand for the new good.
Hence, while goods X and L remain as desirable as be-
fore, the high marginal values of the new good result in
reduced quantities of X and/or L consumed. Hence mar-
ginal utilities of all goods consumed become higher than
before, at initial income levels, the latter being determined
by initial equilibrium labor supply decisions. Integrating
over these marginal utilities, total utility is seen to rise,
potentially dramatically, in the presence of the new good.
Thus, adding “shelter” to a world with “food” and “lei-
sure” might add substantially to utility, if γ is at all large7.
Viewed from an input market perspective, the derived
demands for inputs have gone up; hence real income will
be higher than before, in line with the higher valued
output. The competition in input markets from suppliers
of the new good raises real wages throughout the econ-
omy8. There is, under the introduction of an independent
good, no ambiguity regarding income versus substitution
effects in labor supply—people will want to work more
because wages have risen as a result of wanting more
combined outputs, the new and the old, considered to-
gether. We work to get what we want, and will increase
our supply of labor (and in the context of longer-run de-
velopment, our human capital) to acquire the new goods.
Essentially, introducing the new good (product inno-
vation) increases the value of all goods relative to leisure
at initial levels of leisure, hence, we will work more,
giving up leisure. Contrast this situation with that in
which we only have a technological advance in the pro-
duction of existing goods (process innovation), with no
new goods becoming available.
One’s initial suspicion would be that whether more or
less income would be generated depends on the price
elasticity of demand for existing goods. That is, if on av-
erage existing goods are price elastic, technological pro-
gress that lowered existing goods’ prices would result in
more desired income, hence more work, with reduced lei-
sure. If, conversely, existing goods were inelastically de-
manded, technological advance would lead to less expen-
diture and more leisure, with the unitary elastic case (e.g.
Cobb-Douglas) seemingly representing the watershed case.
However, these arguments fail to incorporate the wage
increases that the productivity gains from the techno-
logical advance allow. Existing goods become cheaper
and we purchase more of them, but we also would be
expected to purchase, at the new optimum, more leisure,
a normal good. As we acquire more of the existing goods
considered collectively at their lower equilibrium prices,
their marginal values will fall, relative to the marginal
value of leisure at the latter’s initial level.
Thus, technological advance for existing goods lowers
their marginal value relative to leisure at initial leisure
levels; hence, we would generally be expected to work
less, acquiring more leisure9. Foreshadowing discussion
to follow, the implications of the preceding variations in
labor supply will be seen to have dynamic implications
for saving as well—implications for business cycles.
That is, in periods when there are an unusually large
amount of desirable new goods being created, we will
not only work more but we will dis-save or reduce the
saving rate, depending on how intensely we desire the
new goods. Conversely, in periods in which abnormally
few desirable new goods are being created we will not
only desire fewer work hours, but will also save at above
normal rates, in anticipation of greater new goods later10.
6The Cobb-Douglas formulation, with zero cross-price elasticities,
represents an extreme case in that the utility of particular goods in the
existing goods vector might either rise (complements) or fall (substi-
tutes) with the introduction certain of the new goods. One may also
refer to think of both original and new goods as vectors, suppressed in
the text discussion.
7The mathematical convenience of normalizing the coefficients to add
to one (implicitly both before and after the introduction of the good),
which yields constant marginal utility of income in the individual’s
LaGrangean maximand, is psychologically misleading, particularly in
the development context. While an ordinal treatment would recognize
that choices are unaffected by renormalizing the coefficients, the cen-
tral labor supply message is greatly affectedgoods are worth more
relative to leisure than before the introduction of the new good(s).
8Note that having a higher marginal utility (value) of the combined
outputs, implies a higher marginal product of labor in equilibrium, as
labor shifts over to the production of the new product, leaving a larger
capital/labor ratio in the production of existing goods. And, of course,
the labor will not move into the production of the new good unless
aid what it could earn in the production of existing goods.
9The discussion here represents one way to rationalize the labor supply
curve to the market being first upward-sloping as individuals add im-
ortant new goods, then backward-
ending as a higher proportion o
goods become “existing” at higher income levels.
10The text discussion is thematically related to Leijonhufvud’s [20]
discussion of liquidity preference versus futures contracts in a world in
which we do not know what we will want in the future. This relates to
Keynesian notions of “ineffective demand” as underlying the business
cycle. Not knowing what goods will exist in the future, as well as how
intensely we will want them, implies that savings may not flow mean-
ingfully into investment. This follows from the fact that existing pro-
ducers will have no valid presumption that observed extra saving now
would lead to greater demand for their products in the future. Note
further, even if flexible work hours existed, a reduction in those hours
would occur concomitantly with an increase in the savings rate (in
anticipation of greater new goods in the future). If we are constrained
in our work hours when few desirable new goods are coming into
existence, layoffs might occur instead of reductions in average work
hours. In this case both the disemployed and those continuing to work
are forced to have non-optimal goods-leisure combinations (e.g.
Clower’s [21] “dual decision hypothesis”).
Copyright © 2011 SciRes. ME
3. Technological Advance and Dynamic
Consumption-Income Patterns
Placing the preceding static discussion in a dynamic
context requires incorporation of two types of techno-
logical progress, progress that brings us existing goods at
lower cost and progress that brings us new goods11. As
indicated in the previous section, technological progress
in existing goods will generally result in reduced labor
supply (and a reduced marginal incentive to invest in
human capital). But, technological progress generating
desirable new goods will generally result in an increased
labor supply (and an enhanced incentive to invest in hu-
man capital).
At any point in time, both types of technological ad-
vance will be going on, though the relative importance of
the two would be expected to vary over time. Two ex-
treme cases present themselves. Consider first the impli-
cations of continual technological advance in the produc-
tion of existing goods, with no new goods being gener-
ated. One would expect, arguing as in Section II, that
there would be a continual increase in goods production
(income), but that would be accomplished with a contin-
ual decrease in labor supply, to balance the falling mar-
ginal utility of goods with that of leisure.
The polar extreme case is that of continual introduc-
tion of new goods, with fixed technology in the produc-
tion of existing goods. In this case, one would expect
increases in labor supply to obtain the new goods, since
they would be “crowding out” marginal amounts of ex-
isting goods, resulting in an overall increase in the mar-
ginal utility of income.
But, a la Rostow as discussed below, there will also be
diminishing marginal utility of new goods provi-
sion—that is, the gain in utility from a new good would
be expected to be diminishing in the number of existing
goods. In the context of the comparison of Equations (1)
and (2), there may be a large percentage utility gain in
adding the third good, for given γ, when there are only
two goods, but this would be unlikely when there are
already n, for large n12. In actual historical data, techno-
logical advance of both types will be occurring at rates
with some expectation and some variance about that ex-
On average, a rough balancing of the two types of
technological advance might be expected. If this proves
to be the case, one would expect hours of work to appear
to be a stationary series. But, the expected random varia-
tion in the relative importance in the two types of tech-
nological advance will be seen to have implications for
growth/development patterns and for business cycle be-
4. Growth Patterns and the Business Cycle
Returning to the stylized facts discussed in the introduc-
tion, consider first those countries with high incomes that
are not “developed” as that word is usually employed.
One cannot merely discover oil, for example, and expect
that this will lead to meaningful development. Indeed, in
a closed economy the discovery of oil would be expected
to have little impact on development, because nothing
about its discovery allows greater production of new
goods, though it might render existing goods production
less expensive, resulting in greater leisure demand and
reduced incentives to acquire education.
Even with trade, while there might be large demands
for the wide variety of newly imported goods in such
countries, the local wage rate might not rise much (pre-
suming that the locally-provided labor intensity of oil
production, the traded good, is low). Moreover, there
will be little incentive to invest in human capital, as the
desired goods that incorporate greater human capital in
their production are not produced domestically13.
Other stylized facts are that a) some countries exhibit
zero or negligibly positive growth, while b) others “take
off” exhibiting high growth rates over a range of income,
and c) highly developed countries tend to have the re-
duced growth rates traditionally associated with “ma-
ture” economies. In the context of the present model, this
Rostow-like pattern can be explained by very low goods
variety in the case of the extremely poor countries; hence
there is little reason to work or invest in human capital
with a long-term (and uncertain) payoff.
The period of “takeoff” corresponds to a country get-
ting rich enough to begin producing an ever-increasing
array of desirable new products, which increase optimal
generated household income via labor supply and human
capital investments14. One might further expect observed
11There might be great practical difficulty in empirically implementing
the ideas here; it would not be easy to determine when a quality change
is sufficiently important to be viewed as a “new” good. Moreover, a
good that is “new” in a poor developing country (e.g. television) might
be old in a developed country. There will generally be overlapping
market penetration curves of a wide variety of new goods with the net
effect on labor supply being an aggregation of effects at the individual
12This provides one explanation for the existence of relatively few
menu selections at restaurants. Eventually the diminishing marginal
value of variety is offset by the ever-growing marginal costs of ascer-
taining what is available.
13Upon inquiring of a young Kenyan boy what he wanted to be when
he grew up, he said, “A driver” (a driver of Land Rovers on safaris).
The imagination necessary to think in terms of the goal of being a
doctor or engineer requires experience of that possibilitya particular
difficulty in a world of “brain-drain” realities.
14Traditional discussions of the role of education in growth implicitly
resume that people will want to get an education if it is supplied. The
resent paper recognizes that whether education is pursued involves
both benefits and costs; a serious demand for education must be largely
redicated on the desire to acquire the income it offers, and that de-
ends on the nature of the goods available.
Copyright © 2011 SciRes. ME
patterns of rapid urbanization in the take-off period, as
economies of scale and agglomeration effects in produc-
tion emerge.
Finally, the mature economy has a very large number
of existing goods implying that introduction of new
goods gives a smaller percentage gain in utility than is
the case when there are a much smaller number of exist-
ing goods. Hence, there is a progressively smaller in-
crease in desired income, hence labor supply, from any
given pattern of innovation or invention.
Thus, the impact of the two types of technological ad-
vance will vary with a country’s position in the devel-
opment process. The same relative amounts of techno-
logical progress in new goods will result in greater de-
sires to generate income in countries where the number
of goods is limited (as per the simple Cobb-Douglas
example of Section II) than is the case in countries with a
plethora of goods in widespread consumption.
To understand the substantial fluctuations about the
growth path, regardless of the stage of growth, one might
examine more fully the two types of technological ad-
vance and their interaction. Take the technological ad-
vance of existing goods, Te, to be normally distributed
with a time invariant mean, μe, and variance, σe. Simi-
larly, let the technological advance of new goods, Tn, be
distributed with mean μn and variance σn.
Under assumed independence between the distribu-
tions Te and Tn, consider various possibilities in the
context of standard growth models, as modified to in-
corporate the fact that consumption and income are
jointly endogenous via labor supply decisions. Starting
from a random history for the two types of technological
advance, there are four general cases: a) both types of
technological advance are unusually large, b) both are
unusually small, c) Te is unusually large while Tn is un-
usually small, and d) Tn is unusually large while Te is
unusually small15.
The situation when both types of technological ad-
vance move up and down together (relative to normal
levels) is of interest. For the case where both types of
technological advance are unusually large, the technical
advances in the production of existing goods would tend
to result in reductions in desired hours of work as dis-
cussed earlier. However, the demands for the wide range
of new products would work oppositely, encouraging
greater work effort. Utility will, however, experience
cyclically rapid growth as more of both types of goods
are obtained at perhaps constant work effort.
The converse case of abnormally low technological
advance for both existing and new goods, would simi-
larly lead to approximately constant hours of work, but
with much lower cyclical growth in utility relative to the
norm. GDP as a measure of welfare might not perform
too badly in either of these cases, since the opposing im-
pacts on leisure demand might approximately cancel.
Consider, however, a case in which there is abnor-
mally high growth in technological advance for existing
goods, but abnormally low such growth for new goods.
In this case, there would be increased desire for greater
leisure in the presence of the growing real wage. The
utility gain from the technological advance would be
taken partly from greater quantities of existing goods,
and partly in the form of greater leisure, as the marginal
value of leisure is equated to the lower marginal values
of incremental existing goods.
It is also possible that traditional dynamic macroeco-
nomic processes stemming from revised expectations
could exacerbate such real business cycle effects, leading
to a recession rather than a mere slowdown. This follows
from the fact that people, in efforts to smooth utility over
time, will wish to save more for future periods when
more new goods are expected to be introduced. This
would be particularly the case, if people were con-
strained to given work hours, since the savings rate
might jump substantially in anticipation of the purchase
of future new goods not yet introduced.
In any event, with flexible hours GDP would under-
state the welfare gains from the technological advance in
existing goods, since part of the benefits of that techno-
logical advance will be taken in the form of greater lei-
sure; income will not be growing as fast as if labor sup-
ply were held constant.
The opposite pattern would occur if there were ab-
normally rapid technological advances in new goods
combined with abnormally slow technological advance
for existing goods. People will desire to work longer
hours, giving up leisure to acquire the new goods. Addi-
tionally, in smoothing utility, they would want to dis-
save in this period (a boomtime) to acquire the abnor-
mally large number of new good introductions, antici-
pating reduced rates of new goods introduction in the
future, when they would expect to replace that saving.
GDP will overstate the gain in welfare in periods such as
this, since leisure is foregone.
5. Summary
The present attempt at understanding economic growth
and the business cycle recognizes explicitly that we work
to get the goods that we want. The goods that we want
can be usefully classified as falling into two broadly de-
fined categories, existing goods and new goods.
By expanding existing notions of technical advance to
allow for the differential rates of technological advance
15More sophisticated treatments might introduce the correlations be-
tween the two types of technological change. This is ignored, for sim-
licity, in the text.
Copyright © 2011 SciRes. ME
for existing and for new goods to have an impact on la-
bor supply, a rich tapestry of possible macroeconomic
scenarios is woven. A given level of growth could be a
result of any of a number of patterns of technological
change, with quite different implications for welfare.
That is, an “average” growth rate might result from av-
erage levels of both types of technological change, in
which case both work-leisure decisions and saving deci-
sions might be at normal levels. This would result in a
relatively smooth future growth path.
Similarly a given average rate of technological pro-
gress can result in widely varying levels of economic
growth depending on whether the technological progress
occurs in existing or new goods. For example, below
average growth in technological advance for existing
goods, and above average growth in technological ad-
vance in new goods, would lead to increased desired
hours of work and dis-saving, with resulting near-term
Alternatively, above average rates of technological
advance for existing goods, with a relative dearth of new
goods might result in desired hours of work falling and
savings increasing, leading to a growth slowdown or
In any of the preceding scenarios, and others that
could be constructed, the quantitative value of GDP as
even a short-run measure of welfare growth is called into
question. Since different combinations of the two types
of technological advance lead to different optimal
goods/leisure combinations, failing to account for leisure
matters16. GDP will overstate utility gain when optimal
leisure decreases in response to an existing pattern of
relative technological advance, and conversely. In no
case, of course, does technological advance of either type
make us worse off, but in gauging quantitatively how
much better off we are, leisure is seen here to matter.
Future work could usefully expand the framework pre-
sented here to allow for international trade. It will be
seen in that work that the distinction made here between
technological advance in existing and in new goods has
implications for the optimality of the unwavering pursuit
of comparative advantage. That is, if technological ad-
vance in new goods results in generalized human capital
enhancement (a positive spillover externality to produc-
tion of all kinds in an economy), pursuing a comparative
advantage in existing goods might be a 2nd best policy in
a dynamic setting.
Illustrating in a simple two-period setting, a small
country might have a comparative advantage in produc-
ing, say, bananas, rice, or diamonds. Hence, in period
one, welfare would be higher if the country specializes in
the comparative advantage good, as in the usual intro-
ductory economics presentations using supply and de-
mand curves or production possibility curves. However,
in period two, the country will have a level of human
capital that has not been augmented, hence might well
find welfare lower than if that country had made itself a
bit worse off in period one, in order to reap the public
good benefits of human capital enhancement in the later
period (s). This could well account for why the Asian
“tigers” have been experiencing rapid growth while other
countries remain mired in poverty17.
It should be stressed, in closing, that the hurdles to be
cleared prior to implementation of the endogenous
growth described here are several. It will be difficult, in
practice, to unambiguously categorize technological ad-
vance as occurring for “new goods” vis-à-vis “existing
goods.” Is the technological advance leading to plasma/
LCD flat screen TVs progress for an existing good or is
that progress such a dramatic departure as to constitute a
new good? If one takes the theory sufficiently seriously,
it is possible that changes in leisure could be taken as a
proxy for the net impact of the two types of technologi-
cal progress (i.e. leisure increases imply a preponderance
of progress in existing goods while leisure decreases
imply a preponderance of progress in new goods). At any
rate, the role of leisure has been largely ignored in exist-
ing endogenous growth models and is seen here to have
important consequences for growth and business cycle
6. Acknowledgements
I would like to acknowledge the comments of Peter Ire-
land, Murat Iyigun, Robert McNown, Peter Mueser, Paul
Romer, Osama Sweidan, and Neven Valev, while ab-
solving them from responsibility for remaining errors.
7. References
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[2] F. O. Bilbiie, F. Ghironi and M. J. Melitz, “Endogenous
Entry, Product Variety, and Business Cycles,” 2007,
[3] F. Canova and J. D. Lopez-Salido, “The Labor Market
Effects of Technology Shocks,” CEPR Discussion Paper
No. 6365, 2007.
[4] Cass, “Optimum Growth in an Aggregative Model of
Capital Accumulation,” Review of Economic Studies, Vol.
32, No. 3, 1965, pp. 233-240. doi:10.2307/2295827
[5] R. W. Clower, “The Keynesian Counter-Revolution: A
16Clearly, the duration of such effects discussed in the main text will
depend to a significant degree on the extent to which both new and
existing goods are durable versus non-durable.
17Of course, the truly poor countries must first survive to the second
eriod. At the lowest stages of development the future might well be
discounted greatly.
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