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Buy National or Buy International? The optimal design of government spending in an open economy

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  • Larch, Mario
  • Lechthaler, Wolfgang

Abstract

Should governments only purchase domestic goods to increase welfare? And would government spending be higher if it was used for domestic goods only? Such proposals, which we call Buy National, were discussed in many countries in the context of the fiscal stimuli used to fight the recent global recession. We augment a simple trade model by government spending and find that the optimal size of government spending of Buy National is higher than the optimal level of government spending that does also include foreign-produced goods (Buy International). However, even though the optimal level of government spending is higher, real GDP and hence welfare are both lower in the Buy National regime.

Suggested Citation

  • Larch, Mario & Lechthaler, Wolfgang, 2013. "Buy National or Buy International? The optimal design of government spending in an open economy," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 87-108.
  • Handle: RePEc:eee:reveco:v:26:y:2013:i:c:p:87-108
    DOI: 10.1016/j.iref.2012.08.010
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    References listed on IDEAS

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    1. repec:eee:glofin:v:33:y:2017:i:c:p:1-26 is not listed on IDEAS

    More about this item

    Keywords

    Buy American; Buy International; Buy National; Optimal government spending;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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