abstract

The impact of international trade on domestic growth is revisited in a model with dynamic externalities and static increasing returns to scale. The model embraces features of both classical and new growth and trade theories, allows for learning by doing, and integrates several strains of thought in a general equilibrium with two regions. In contrast to previous work, the model shows that international convergence of growth rates can occur despite the fact that the less developed region specializes in low-growth sectors. This is due to a distortion of the Ricardian or Heckscher-Ohlin type specialization forces through monopolistic competition. Less developed regions can therefore manage to converge by participating in intraindustry trade. On the normative side, the model clarifies that repeated static gains from free trade weigh so heavily that a welfare-maximizing developing country may choose to give up modern sectors and to grow more slowly. It may agree to diverge in order to exploit the gains from trade, but it can manage to converge through participating in intraindustry trade.

jel: F43, O41

background

• supporting files
  • equilibrium derivations and welfare simulations (mathematica 4 notebook) [nb 22k]
  • please download the mathematica book style file for best display [nb 35k]