The Dance of the Dynamics: The Interplay of Trade and Growth
34 Pages Posted: 26 Feb 2013 Last revised: 1 Mar 2013
Date Written: August 1, 2012
Abstract
We study the interaction of endogenous growth and Ricardian trade working solely through comparative advantage. The model is built to be consistent with several facts about technical progress, R&D activity, industrial organization, and trade. We obtain a full characterization of the transition dynamics and trade's welfare effects. We find that trade affects growth and that growth affects trade in ways previously unexplored. The model can explain in a single framework several observed phenomena usually analyzed separately. Beside the usual efficiency gains, trade may raise or lower initial output of either country through a cross-industry externality. More important, trade may increase or decrease the balanced growth rate of either country, with the possibility of a decrease arising from a growth-related dynamic inefficiency. Trade leads to equal growth rates for some countries but permanently unequal growth rates for others. In general, the world's distribution of growth rates may become one of 'twin peaks' with groups of countries having persistently high or low growth rates. Trade leads to effective technology transfer, with a country's growth rate being the same as if that country had adopted its trading partner's R&D technology even though no such technology transfer ever occurs. Effective technology transfer offers a new interpretation of the evidence on productivity gains from trade. Economic growth can change the trading regime endogenously by moving the world economy across the boundary of the standard Ricardian interior (complete specialization) and corner (incomplete specialization) solutions. Through its effects on economic dynamics, trade may raise or lower social welfare in the short run, the long run, or both. For all results, the model specifies the conditions under which each possible outcome occurs.
Keywords: International trade, comparative advantage, endogenous growth, endogenous market structure
JEL Classification: O40, F10, F43, D24, D40
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Cost Reduction, Entry, and the Dynamics of Market Structure and Economic Growth
-
Variety, Spillovers and Market Structure in a Model of Endogenous Technological Change
-
Growth, Market Structure, and the Welfare Effects of Economic Integration
-
Specialization, Knowledge Dilution, and Scale Effects in an Io-Based Growth Model
By Pietro F. Peretto and Sjak Smulders
-
Investment in Knowledge and Capital in Oligopoly: Balanced Growth, Poverty Traps and Indeterminacy
-
Firm Size, Rivalry and the Extent of the Market in Endogenous Technological Change
-
Trade Liberalization, Competition and Growth
By Omar Licandro and Antonio Navas
-
R&D in the Network of International Trade: Multilateral versus Regional Trade Agreements