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Trade Agreements, Bargaining and Economic Growth

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Abstract

Rebelo's two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.

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Bibliographic Info

Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2010/2.

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Length: 30
Date of creation:
Date of revision: 30 May 2010
Publication status: forthcoming in Journal of Macroeconomics
Handle: RePEc:haf:huedwp:wp201002

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Keywords: International trade; Aid; Balanced Growth;

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  1. Felbermayr, Gabriel J., 2004. "Specialization on a Technologically Stagnant Sector Need Not Be Bad for Growth," Center for European, Governance and Economic Development Research Discussion Papers 24, University of Goettingen, Department of Economics.
  2. Michael Devereux, 1990. "Growth, Specialization, and Trade Liberalization," Working Papers 786, Queen's University, Department of Economics.
  3. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  4. Frank Ackerman, . "05-01 "The Shrinking Gains from Trade: A Critical Assessment of Doha Round Projections"," GDAE Working Papers 05-01, GDAE, Tufts University.
  5. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  6. Sergio T. Rebelo, 1992. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  7. Daniel Cohen & Pierre Jacquet & Helmut Reisen, 2006. "After Gleneagles: What Role for Loans in ODA?," OECD Development Centre Policy Briefs 31, OECD Publishing.
  8. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  9. Jason G. Cummins & Giovanni L. Violante, 2002. "Investment-specific technical change in the US (1947-2000): measurement and macroeconomics consequences," Finance and Economics Discussion Series 2002-10, Board of Governors of the Federal Reserve System (U.S.).
  10. Suwa Eisenmann, Akiko & Verdier, Thierry, 2007. "Aid and Trade," CEPR Discussion Papers 6465, C.E.P.R. Discussion Papers.
  11. Chan, Kenneth S., 1988. "Trade negotiations in a Nash bargaining model," Journal of International Economics, Elsevier, vol. 25(3-4), pages 353-363, November.
  12. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  13. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.
  14. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  15. Kennan, John & Riezman, Raymond, 1988. "Do Big Countries Win Tariff Wars?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 81-85, February.
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