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Neoclassical growth, manufacturing agglomeration, and terms of trade

Listed author(s):
  • Urban, Dieter M.

    (Department of Economics, Copenhagen Business School)

This study reverses the prediction of geography and growth models that trade integration may cause income divergence. Moreover, a new dynamic welfare gain of trade openness is identified. These results are obtained from embedding a new economic geography model into a neoclassical growth model. Starting from symmetric countries, a country that accumulates more capital than the other increases its home market size, improves its terms of trade, and lowers its relative consumption price index, because trade costs drive a wedge in between relative producer and consumption price indices. Both effects in turn tend to increase its marginal revenue product of capital relative to the other country (divergence forces), while factor substitution diminishes its marginal revenue product of capital (convergence force). Reducing trade costs decreases the wedge and weakens the divergence forces, while the convergence force is unaffected. Hence, divergence is more likely with higher rather than lower trade costs. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.
(This abstract was borrowed from another version of this item.)

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Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 16-1998.

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Length: 43 pages
Date of creation: 01 Jan 1998
Handle: RePEc:hhs:cbsnow:1998_016
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Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Phone: 38 15 25 75
Fax: 38 15 34 99
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