Evolution in Division of Labor and Macroeconomic Policies

The relative merits of income-tax and money financing of a constant share of government expenditure in GNP are assessed in a dynamic learning-by-doing model with endogenous specialization. It is shown that the mode of the financing policy has real effects, in particular on the speed of evolution in division of labor and the growth rate of an economy. Different government financing methods invoke different effects; as the economy develops, the effectiveness of these policies may vary with the extent of the division of labor. Some of the effects are also found to be substantially different from those in conventional models with exogenous specialization.