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Growth Effects of Free Trade under Increasing Returns

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  • Ilaria Ossella‐Durbal

Abstract

This paper addresses the long‐term sustainability of the growth effects from trade, within the context of a dynamic optimization model where the investment sector exhibits an initial phase of increasing returns. It is proved that the qualitative properties of trade and growth remain valid, even for decreasing, rather than constant, returns to scale in the consumption sector. That is, trade enables an economy to escape a “poverty trap” and enjoy unbounded growth. Moreover, the asymptotic long‐run growth rate of the optimal consumption levels with trade is determined, establishing that trade has a beneficial effect on long‐run growth. JEL Classification Numbers: O41, F12.

Suggested Citation

  • Ilaria Ossella‐Durbal, 2002. "Growth Effects of Free Trade under Increasing Returns," The Japanese Economic Review, Japanese Economic Association, vol. 53(4), pages 389-406, December.
    • Handle: RePEc:bla:jecrev:v:53:y:2002:i:4:p:389-406
    DOI: 10.1111/1468-5876.00235
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    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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