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Neoclassical growth, manufacturing agglomeration, and terms of trade

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  • Urban, Dieter M.

    (Department of Economics, Copenhagen Business School)

Abstract

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.
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Suggested Citation

  • Urban, Dieter M., 1998. "Neoclassical growth, manufacturing agglomeration, and terms of trade," Working Papers 16-1998, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:1998_016
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    1. T. N. Srinivasan & Jagdish Bhagwati, 2001. "Outward-Orientation and Development: Are Revisionists Right?," Palgrave Macmillan Books, in: Deepak Lal & Richard H. Snape (ed.), Trade, Development and Political Economy, chapter 1, pages 3-26, Palgrave Macmillan.
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    Cited by:

    1. Straubhaar, Thomas & Suhrcke, Marc & Urban, Dieter, 2002. "Divergence - Is it Geography?," Discussion Paper Series 26350, Hamburg Institute of International Economics.
    2. Baldwin, Richard E. & Martin, Philippe, 2004. "Agglomeration and regional growth," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 60, pages 2671-2711, Elsevier.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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