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Growth and Welfare in a Small Open Economy

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  • Grossman, Gene M.
  • Helpman, Elhanan

Abstract

We construct a model of growth based on endogenous technological change in a small, open economy. Entrepreneurs develop new intermediate products whenever the present value of potential profits exceeds the cost of R&D. Diversity of intermediates contributes to total factor productivity in the production of final goods. The economy produces two such final goods, and trades these at exogenously given world prices. We study the welfare implications of R&D subsidies and commercial policy. There exists an optimal subsidy to R&D that speeds growth relative to the market-determined rate. The optimal subsidy achieves the first-best rate of growth, but not the first-best level of welfare. Small tariffs and export subsidies also affect both growth and welfare. Growth may increase or decrease, depending upon which sector is promoted by the trade policy. But an increase in the growth rate is neither necessary nor sufficient for a trade policy to improve welfare. Finally, we compare tariffs and quotas, when the latter give rise to rent-seeking behavior. The diversion of resources from innovative activities to rent seeking can have dire implications for growth and welfare.

Suggested Citation

  • Grossman, Gene M. & Helpman, Elhanan, 1989. "Growth and Welfare in a Small Open Economy," Foerder Institute for Economic Research Working Papers 275466, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275466
    DOI: 10.22004/ag.econ.275466
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    File URL: http://ageconsearch.umn.edu/record/275466/files/TEL-AVIV-FSWP-143.pdf
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    References listed on IDEAS

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    1. Baumol, William J., 1988. "Entrepreneurship: Productive, Unproductive and Imitative: or the Rule of the Rules of the Game," Working Papers 88-07, C.V. Starr Center for Applied Economics, New York University.
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    Cited by:

    1. van de Klundert, T.C.M.J., 1990. "Crowding out and the wealth of nations," Discussion Paper 1990-29, Tilburg University, Center for Economic Research.
    2. Neema Mori & Gibson Munisi, 2012. "The Role of the Internet in Overcoming Information Barriers: Implications for Exporting SMEs of the East African Community," Journal of Entrepreneurship, Management and Innovation, Fundacja Upowszechniająca Wiedzę i Naukę "Cognitione", vol. 8(2), pages 60-77.
    3. Aizenman, Joshua, 1992. "Trade reforms, credibility, and development," Journal of Development Economics, Elsevier, vol. 39(1), pages 163-187, July.
    4. Frédéric Lordon, 1991. "Théorie de la croissance : quelques développements récents [Deuxième partie : la redécouverte des rendements croissants]," Revue de l'OFCE, Programme National Persée, vol. 37(1), pages 191-243.
    5. Tudose Mihaela Brindusa & Cadiş Mihaela Narciza, 2013. "The Role Of Education In The Economic Development," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 85-92, August.
    6. Sala-I-Martin, X., 1990. "Lecture Notes On Economic Growth: Five Prototype Models Of Endogenous Growth," Papers 622, Yale - Economic Growth Center.
    7. Ozturk, Ilhan, 2001. "The role of education in economic development: a theoretical perspective," MPRA Paper 9023, University Library of Munich, Germany.
    8. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "International Trade with Endogenous Technological Change," World Scientific Book Chapters, in: Francisco L Rivera-Batiz & Luis A Rivera-Batiz (ed.),International Trade, Capital Flows and Economic Development, chapter 2, pages 33-70, World Scientific Publishing Co. Pte. Ltd..
    9. Patrick Artus, 1993. "Croissance endogène : revue des modèles et tentatives de synthèse," Revue Économique, Programme National Persée, vol. 44(2), pages 189-228.
    10. Roger Alejandro Banegas Rivero & Marco Alberto Nuñez Ramirez & Jorge Salas Vargas & Luis Fernando Escobar Caba & Sacnicté Valdez del Río, 2019. "Landlocked Countries, Natural Resources and Growth: The Double Economic Curse Hypothesis," International Journal of Energy Economics and Policy, Econjournals, vol. 9(5), pages 113-124.
    11. Young, Ralph, 1993. "Economics of Innovation: Black Hole or Positive Sum?," 1993 Conference (37th), February 9-11, 1993, Sydney, Australia 147920, Australian Agricultural and Resource Economics Society.
    12. John F. Helliwell & Alan Chung, 1991. "Macroeconomic Convergence: International Transmission of Growth and Technical Progress," NBER Chapters, in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 388-436, National Bureau of Economic Research, Inc.
    13. Christou, Costas, 2001. "Differential Borrowing Constraints and Investment in Human Capital," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 277-295, April.
    14. Maria-Simona NAROȘ & Mihaela SIMIONESCU, 2018. "The role of life-long education in achieving sustainable development," Institute for Economic Forecasting Conference Proceedings 180501, Institute for Economic Forecasting.
    15. Karagiannis, Dimitris & Metaxas, Theodore, 2017. "Local Authorities’ contribution on Gastronomy Tourism Development: the case of Ontario, Canada," MPRA Paper 79325, University Library of Munich, Germany.
    16. Padoan, Pier Carlo, 1998. "Trade, knowledge accumulation and diffusion: A sectoral perspective1," Structural Change and Economic Dynamics, Elsevier, vol. 9(3), pages 349-372, September.
    17. Badibanga, Thaddee Mutumba & Diao, Xinshen & Roe, Terry L. & Somwaru, Agapi, 2008. "Dynamics of Structural Transformation: Understanding the Key Factors That Drive Innovative Activities in Selected Asian and African Countries," Bulletins 43890, University of Minnesota, Economic Development Center.
    18. Badibanga, Thaddee & Diao, Xinshen & Roe, Terry & Somwaru, Agapi, 2009. "Dynamics of structural transformation: An empirical characterization in the case of China, Malaysia, and Ghana," IFPRI discussion papers 856, International Food Policy Research Institute (IFPRI).
    19. Faiza Umer & Shaista Alam, 2013. "Effect of Openness to Trade and FDI on Industrial Sector Growth: A Case Study for Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(48), pages 179-198, June.
    20. Padoan, Pier Carlo, 1996. "Trade and the accumulation and diffusion of knowledge," Policy Research Working Paper Series 1679, The World Bank.

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    Financial Economics; Public Economics;

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