The Dance of the Dynamics: The Interplay of Trade and Growth

34 Pages Posted: 26 Feb 2013 Last revised: 1 Mar 2013

See all articles by Lei Ji

Lei Ji

Shanghai University of Finance and Economics

John J. Seater

Economics Dept., Boston College

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

Ji, Lei and Seater, John J., The Dance of the Dynamics: The Interplay of Trade and Growth (August 1, 2012). Available at SSRN: https://ssrn.com/abstract=2223307 or http://dx.doi.org/10.2139/ssrn.2223307

Lei Ji

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

John J. Seater (Contact Author)

Economics Dept., Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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