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Authors:

• Dennis Tao YANG
  Virginia Polytechnic Institute and State University and Chinese University of Hong Kong

• Xiaodong ZHU
  University of Toronto

This paper develops a two-sector model that illuminates the transition mechanisms behind economic stagnation to growth. When traditional technology is used in agriculture, industrial TFP growth lowers the relative price of industrial to agricultural products, but has limited effect on GDP per capita growth, because most labor must remain in farming. The economy cannot embark on sustained growth until this relative price drops below a certain threshold, triggering farmers to switch from a traditional technology to a modern technology that uses industry-supplied inputs. Agricultural modernization frees the economy from the Malthusian trap through a series of structural changes that translate industrial TFP growth into aggregate growth. Quantitative analysis based on historical data from England between 1700 and 1909 accounts well for the observed changes in relative price, agricultural mechanization, per capita income growth and other aspects of the Industrial Revolution.