The Taste of Change: Theory and Evidence on Demand Driven Structural Transformation

This paper examines the role of evolving consumer preferences in driving structural change through the lens of time-varying demand shifters – Temporal Demand Growth Factors (TGFs) – in a general equilibrium model with technological change. I derive analytical solutions that demonstrate how TGFs interact with factor-augmenting technical growth rates in shaping sectoral composition. Using aggregate US expenditure data over the period 1960-2023, I provide empirical evidence of significant TGF effects driving structural change. The results show divergence in sectoral TGFs, with services outpacing manufacturing with a 5% difference in the annual demand growth rates. TGF driven changes in consumer demand, not captured in traditional models, play a crucial role in structural transformation.