Neoclassical Growth, Manufacturing Agglomeration, and Terms of Trade
AbstractThis study reverses the prediction of geography and growth models that trade integration may cause income divergence. Moreover, a new dynamic welfare gain of trade openness is identified. These results are obtained from embedding a new economic geography model into a neoclassical growth model. Starting from symmetric countries, a country that accumulates more capital than the other increases its home market size, improves its terms of trade, and lowers its relative consumption price index, because trade costs drive a wedge in between relative producer and consumption price indices. Both effects in turn tend to increase its marginal revenue product of capital relative to the other country (divergence forces), while factor substitution diminishes its marginal revenue product of capital (convergence force). Reducing trade costs decreases the wedge and weakens the divergence forces, while the convergence force is unaffected. Hence, divergence is more likely with higher rather than lower trade costs. Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of International Economics.
Volume (Year): 15 (2007)
Issue (Month): 5 (November)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576
Other versions of this item:
- Urban, Dieter M., 1998. "Neoclassical growth, manufacturing agglomeration, and terms of trade," Working Papers 16-1998, Copenhagen Business School, Department of Economics.
- Dieter M. Urban, 2000. "Neoclassical Growth, Manufacturing Agglomeration and Terms of Trade," Development Working Papers 136, Centro Studi Luca d\'Agliano, University of Milano.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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- Thomas Straubhaar & Marc Suhrcke & Dieter Urban, 2002.
"Divergence – Is it Geography?,"
Development Working Papers
158, Centro Studi Luca d\'Agliano, University of Milano.
- Baldwin, Richard & Martin, Philippe, 2003.
"Agglomeration and Regional Growth,"
CEPR Discussion Papers
3960, C.E.P.R. Discussion Papers.
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