Pattern of trade and indeterminacy

This paper presents a three-sector small open endogenous growth model with physical and human capital and constant returns to scale. The model shows that the transitional path may be either saddle-path stable or indeterminate, depending on the pattern of specialization. This occurs for two reasons. First, in the presence of capital and labor income taxes, factor intensity rankings between the operating corporate sector and the education sector in value and physical senses can differ, which may cause too many stabilizing forces. Second, the change in the pattern of specialization discretely changes factor intensities in the operating corporate sector.