We develop a two-country growth model distinguishing between a market sector producing services that can also be home-produced and a market sector producing goods without home-produced substitutes. The former is a technologically “stagnant” sector, while the latter is subject to learning by doing and technological spillovers. This distinction coincides in the model with the distinction between the sector producing non tradables and the sector producing internationally tradable goods. We study how differentials in labor tax rates across countries, which determine differences in the allocation of households’ time between market activities and home activities, influence also the mix of tradable and non-tradable goods that characterizes the market output of each country, thus affecting their bilateral trade balance and growth rates.
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Paper provided by Department of Economics University of Milan Italy in its series Departemental Working Papers with number
2009-13.
Find related papers by JEL classification: F10 - International Economics - - Trade - - - General F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models