An Analysis of Public Intermediate Goods Supply in a Dynamic Small Open Economy Once Again

Abstract:     
This study re-examines McMillan’s analysis (1978) of a dynamic small open economy with a public intermediate good. On the trade patterns of the open economy, we find results that were overlooked in McMillan’s analysis. Among others, if labor endowment is of intermediate size, there are multiple long-run equilibria and the initial stock of the public good determines the long-run trade pattern. We also add the gains-from-trade analysis to McMillan’s model and show that if the economy has a comparative advantage in a good with productivity less sensitive to the public intermediate good, the economy may lose from trade in the long run.

Number of Pages in PDF File: 21

Keywords: Public Intermediate Good, Specialization Patterns, Multiple Equilibria, Gains/Losses from Trade

JEL Classification: F10, H41, H54

working papers series