Helping thy neighbour: productivity, welfare and international trade
AbstractWe describe the relation between welfare growth and productivity growth. We argue that differences in productivity and productivity growth between sectors or countries are irrelevant from a policy perspective. Specialisation is based on the comparative advantages of countries. Since, by nature, some sectors witness higher productivity growth than others, so do countries. Although, at the global level, productivity growth and welfare growth are two sides of the same coin, at the national level they are not. The welfare effects of productivity growth in part leak away to consumers in other countries because technological progress is translated into a decline of export prices relative to import prices. Or stated differently, importing countries benefit from the lower prices due to technological innovations in exporting countries. These terms of trade effects of productivity growth on welfare do not only exist in theory. Empirically, we find significant and large terms of trade effects. Our overall conclusion is that once this trade perspective is taken into account, productivity is less attractive as a primary policy goal for governments. The primary task for governments is rather to create an environment in which private agents can explore the comparative advantages they have.
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Bibliographic InfoPaper provided by EconWPA in its series International Trade with number 0404008.
Length: 14 pages
Date of creation: 09 Apr 2004
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Note: Type of Document - pdf; pages: 14
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welfare; comparative advantages; terms of trade; productivity; economic policy;
Find related papers by JEL classification:
- D60 - Microeconomics - - Welfare Economics - - - General
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
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