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Economic Development under Alternative Trade Regimes

How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector-neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade, and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.

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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2005-02.

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Length: 39 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mtl:montde:2005-02
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  1. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative prices and relative prosperity," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
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  17. Jones, Charles I., 1994. "Economic growth and the relative price of capital," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 359-382, December.
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  19. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  20. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
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