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Trade and growth in a model of allocative inefficiency

Trade and growth in a model of allocative inefficiency AbstractThe empirical evidence on the causal relationship between international trade and economic growth is inconclusive. While some studies show that trade leads to growth, others have pointed to a reverse causation. In this paper, we develop a model of international trade and productivity growth in the presence of a misallocation of resources. Misallocation in a country arises as a result of lobbying by firms to establish barriers to the competitive allocation of labor. Misallocation prevents the country from exploiting its technological comparative advantage and leads to a reduction in the volume of trade in the absence of any explicit trade barriers. In the model, whether barriers diminish or worsen with productivity growth depends on the extent of the initial resource misallocation. If the initial resource misallocation is not severe, then productivity growth leads to diminishing barriers and vice versa. In either case, productivity growth strengthens the comparative advantage over time and therefore increases the volume of trade. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Trade and growth in a model of allocative inefficiency

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References (43)

Publisher
de Gruyter
Copyright
©2017 Walter de Gruyter GmbH, Berlin/Boston
ISSN
1935-1690
eISSN
1935-1690
DOI
10.1515/bejm-2014-0169
Publisher site
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Abstract

AbstractThe empirical evidence on the causal relationship between international trade and economic growth is inconclusive. While some studies show that trade leads to growth, others have pointed to a reverse causation. In this paper, we develop a model of international trade and productivity growth in the presence of a misallocation of resources. Misallocation in a country arises as a result of lobbying by firms to establish barriers to the competitive allocation of labor. Misallocation prevents the country from exploiting its technological comparative advantage and leads to a reduction in the volume of trade in the absence of any explicit trade barriers. In the model, whether barriers diminish or worsen with productivity growth depends on the extent of the initial resource misallocation. If the initial resource misallocation is not severe, then productivity growth leads to diminishing barriers and vice versa. In either case, productivity growth strengthens the comparative advantage over time and therefore increases the volume of trade.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: May 25, 2017

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