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Fiscal policy, specialization, and trade in the two-sector model: the return of Ricardo?

  • Marianne Baxter

This paper develops a two-sector neoclassical model of international trade with endogenous capital accumulation and intertemporal optimization. In contrast to the traditional “2x2x2” model, there is a Ricardian implication that countries specialize according to comparative advantage. Consequently, the theory predicts that government expenditure policies are unlikely to affect the established pattern of specialization and trade, but that changes in tax policies can result in a dramatic reorganization of world production. Further, the dynamic “2x2x2” model can explain many of the salient features of international trade that are problematic for the standard Heckscher-Ohlin-Samuelson model.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 56.

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Date of creation: 1991
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Handle: RePEc:fip:fedmem:56
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