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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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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. Chan, Kenneth S., 1988. "Trade negotiations in a Nash bargaining model," Journal of International Economics, Elsevier, Elsevier, vol. 25(3-4), pages 353-363, November.
  2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 97-109, January.
  3. Bulow, Jeremy & Rogoff, Kenneth S., 2005. "Grants versus Loans for Development Banks," Scholarly Articles 11129181, Harvard University Department of Economics.
  4. Cummins, Jason G & Violante, Giovanni L, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3584, C.E.P.R. Discussion Papers.
  5. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 81-85, February.
  6. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  7. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  8. Gabriel J. Felbermayr, 2007. "Specialization on a technologically stagnant sector need not be bad for growth," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 682-701, October.
  9. Daniel Cohen & Pierre Jacquet & Helmut Reisen, 2006. "After Gleneagles: What Role for Loans in ODA?," OECD Development Centre Policy Briefs, OECD Publishing 31, OECD Publishing.
  10. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  11. Frank Ackerman, . "05-01 "The Shrinking Gains from Trade: A Critical Assessment of Doha Round Projections"," GDAE Working Papers, GDAE, Tufts University 05-01, GDAE, Tufts University.
  12. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, Elsevier, vol. 67(1), pages 79-99, February.
  13. Michael Devereux, 1990. "Growth, Specialization, and Trade Liberalization," Working Papers, Queen's University, Department of Economics 786, Queen's University, Department of Economics.
  14. Robert Hunter Wade, 2003. "What strategies are viable for developing countries today? The World Trade Organization and the shrinking of ‘development space’," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 28239, London School of Economics and Political Science, LSE Library.
  15. Akiko Suwa-Eisenmann & Thierry Verdier, 2007. "Aid and trade," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 23(3), pages 481-507, Autumn.
  16. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 18(2), pages 155-162, April.
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