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Abstract

Structural change or the change in the sectoral composition of output is a common component in the growth process in developing economies. Not recognized in previous models of this process is the households' choice of urban - rural residency which not only alters the demand for regionally specific goods (e.g., housing, education, health), and hence the cost of living, but also the stock of rural - urban labor and the rate of growth and structural change. We investigate the relationship between GDP growth, regional imbalances, and rural-urban migration using a neoclassical multi-region-sector growth model. The household decision for migration is dependent on the cost-of living differentials implied by the relative changes in regional home goods prices across regions as capital deepening occurs and the capital stock within each region evolves. Results show that allowing for residency choice provides a much richer explanation of the forces of structural change and growth.

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