Trapped Factors and China's Impact on Global Growth

41 Pages Posted: 10 Mar 2014 Last revised: 30 Sep 2014

See all articles by Nicholas Bloom

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Paul Romer

Leonard N. Stern School of Business - Department of Economics

Stephen Terry

Boston University

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: March 2014

Abstract

In a general equilibrium product-cycle model, lower trade barriers increase Southern purchasing power, which lifts long-run growth by increasing the profit from innovation. In the short run, factors of production must be reallocated inside firms, which lowers the opportunity cost of innovation, generating an additional trapped factor effect. Starting from a baseline OECD growth rate of 2% we find that trade integration with low-wage countries in the decade around China's WTO accession could have increased long-run growth to 2.4%. There is an additional short-run trapped factors effect, raising growth to 2.7%. China accounts for about half of these growth increases.

Suggested Citation

Bloom, Nicholas and Romer, Paul and Terry, Stephen and Van Reenen, John Michael, Trapped Factors and China's Impact on Global Growth (March 2014). NBER Working Paper No. w19951. Available at SSRN: https://ssrn.com/abstract=2406753

Nicholas Bloom (Contact Author)

Stanford University - Department of Economics ( email )

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Paul Romer

Leonard N. Stern School of Business - Department of Economics ( email )

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Stephen Terry

Boston University ( email )

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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Centre for Economic Policy Research (CEPR)

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