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Trapped Factors and China's Impact on Global Growth

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  • Nicholas Bloom
  • Paul Romer
  • Stephen Terry
  • John Van Reenen

Abstract

In a general equilibrium product-cycle model, lower trade barriers in-crease 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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1261.

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Date of creation: Mar 2014
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Handle: RePEc:cep:cepdps:dp1261

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Innovation; trade; China; endogenous growth;

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