Extensions to the Three-Sector Model

Abstract

Chapters 3 and 4 present the theoretical foundations of multisector closed and open economy models. These models are useful for understanding the basic forces of economic growth, but are highly stylized. The purpose of this chapter is to extend the basic models in three ways: introduce (i) intermediate inputs, (ii) composite capital, and (iii) government. We introduce separately each of these extensions for pedagogical reasons which also keeps the notation relatively simple, and for parsimony which is often desirable in empirical applications.