Logic of Aid in an Intertemporal Setting
This paper studies the welfare implications of temporary foreign aid in the context of a simple two-country model of trade. In addition to its usual effects, a transfer of income in one period is assumed to influence the pattern of consumption of the recipient country in the following period. The implied change in the terms of trade is consistent with a number of possible outcomes with respect to the intertemporal welfare of the donor, the recipient, and the world as a whole. Particular attention is devoted to the conditions for strict Pareto improvement, the only case consistent with the presumption that the acts of giving and receiving aid are voluntary.
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