History‐Dependent Paths and Trade Gains in a Small Open Economy with a Public Intermediate Good
Tohoku University - Graduate School of International Cultural Studies
Nagoya University - Graduate School of Economics
International Economic Review, Vol. 53, Issue 1, pp. 303-314, 2012
This study reexamines McMillan's (International Economic Review 19 (1978), 665–78) analysis of a dynamic small open economy with a public intermediate good. Concerning 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 two saddle‐point steady states, and the initial stock of the public good determines the long‐run trade pattern. We also add a gains‐from‐trade analysis to McMillan's model and demonstrate 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 at the steady state.
Date posted: February 24, 2012