Exceptional Argentina Di Tella, Glaeser and Llach - Thomas Piketty

the primary sector, using land and capital, while the manufactured good is produced in the
secondary sector, using labor and capital. The non-tradable good ( n ) is labeled as a service and is
produced using labor only. The economy is endowed with K units of capital, T units of land
and L units of labor.
The tradable goods are produced using the following Cobb-Douglas production functions: 3
Y
= AT
1−α
α
a
K a
Y
m
= ML
1−β
m
K
β
m
The non-tradable good is produced with the following linear technology:
Y
i
is the total output of good i and
i ∈ a,
m,
n
Y
n
= L n
K
i
( L
i
) is the amount of capital (labor) employed in
where
sector { }. A ( M ) is total factor productivity in the primary (secondary) sector. We
assume that capital is used more intensively in the secondary sector: 0 ≤ α ≤ β ≤1. We also
assume that there are many competitive firms in each sector, which allows us to cast the model in
terms of a representative firm of the sector that behaves competitively.
Since our focus is on the functional distribution of income, we consider three types of agents:
workers, endowed with one unit of labor; landowners, endowed with equal shares of the total
rewards to land; and capitalists, endowed with equal shares of total capital. Agents consume the
three goods ( a , m , n ), for which they have identical preferences as represented by a
Cobb-Douglas utility function: 4 ( )
nj
U
j
= φ ln c + φ ln c + 1−φ
−φ
a
aj
m
mj
a
m
ln c
where c
ij
is the consumption by agent j of good i . We will use
aggregate consumption for good i .
C
i
to denote
We assume that the Argentine economy is a price-taker in world markets. Therefore, the
international price for the agricultural good p
a
and the manufactured good p
m
are considered
exogenous. The terms of trade are denoted by π = p
a/
pm
, i.e., the relative price of exports over
imports. We also assume the absence of any international capital markets; therefore, trade should
be balanced in equilibrium.
3 The parameters A and M in the production functions of the tradable goods can be interpreted as neutral technological
shocks. However, if the production function were instead to include an additional imported input with a low elasticity
of substitution, then an increase in the price of that input could be interpreted as a change in A and/or M.
4 Homogeneity of degree one allows us to ignore distributional issues in computing the steady state of the economy and
studying its equilibrium properties. Unitary elasticity of substitution also simplifies the computation of the steady
state.