Productivity, Tradability, and the Great Divergence * Davis. We Thank David Jacks and Janine Flathmann for Excellent Research Assistance. for Helpful Comments We Thank

For the first-generation models of very long-run growth, empirical success has been mixed. As growth theory now moves beyond one-sector, one-country models, the “industrial revolution” is typically mapped onto a modern-traditional goods dichotomy with differential productivity in rich and poor countries. We argue for the usefulness of an alternative framework, where goods are differentiated by tradability and productivity. The two characteristics can interact, and can help explain an important, but little noticed stylized fact: that, over time, the Balassa-Samuelson effect is getting stronger and stronger. Previous studies have missed this fact. Theorists have not employed it as a check on the model. Being unnoticed, it has gone unexplained. We employ a Ricardian continuum-of-goods model to explain this fact and find that endogenous tradability allows for theory and history to be consistent under a wide range of underlying productivity shocks. Moreover, this theory could illuminate studies of economic growth both past and present. * Taylor gratefully acknowledges the support of the Chancellor’s Fellowship at the University of California, Davis. We thank David Jacks and Janine Flathmann for excellent research assistance. For helpful comments we thank Stephen Broadberry, Nicholas Crafts, Mark Taylor, and Maurice Obstfeld. All errors are ours.