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Growth and Welfare in A Small Open Economy


  • Gene M. Grossman
  • Elhanan Helpman


We construct a model of growth based on endogenous technological change in a small, open economy. Entrepreneurs develop new intermediate products whenever the present value of potential profits exceeds the cost of R&D. Diversity of intermediates contributes to total factor productivity in the production of final goods. The economy produces two such final goods, and trades these at exogenously given world prices. We study the welfare implications of R&D subsidies and commercial policy. There exists an optimal subsidy to R&D that speeds growth relative to the market-determined rate. The optimal subsidy achieves the first-best rate of growth, but not the first-best level of welfare. Small tariffs and export subsidies also affect both growth and welfare. Growth may increase or decrease, depending upon which sector is promoted by the trade policy. But an increase in the growth rate is neither necessary nor sufficient for a trade policy to improve welfare. Finally, we compare tariffs and quotas, when the latter give rise to rent-seeking behavior. The diversion of resources from innovative activities to rent seeking can have dire implications for growth and welfare.

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  • Gene M. Grossman & Elhanan Helpman, 1989. "Growth and Welfare in A Small Open Economy," NBER Working Papers 2970, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2970
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    1. Grossman, Gene M & Helpman, Elhanan, 1990. "Comparative Advantage and Long-run Growth," American Economic Review, American Economic Association, vol. 80(4), pages 796-815, September.
    2. Baumol, William J., 1988. "Entrepreneurship: Productive, Unproductive and Imitative: or the Rule of the Rules of the Game," Working Papers 88-07, C.V. Starr Center for Applied Economics, New York University.
    3. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
    4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    1. Patrick Artus, 1993. "Croissance endogène : revue des modèles et tentatives de synthèse," Revue Économique, Programme National Persée, vol. 44(2), pages 189-228.
    2. Aizenman, Joshua, 1992. "Trade reforms, credibility, and development," Journal of Development Economics, Elsevier, vol. 39(1), pages 163-187, July.
    3. John F. Helliwell & Alan Chung, 1991. "Macroeconomic Convergence: International Transmission of Growth and Technical Progress," NBER Chapters,in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 388-436 National Bureau of Economic Research, Inc.
    4. Christou, Costas, 2001. "Differential Borrowing Constraints and Investment in Human Capital," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 277-295, April.
    5. Karagiannis, Dimitris & Metaxas, Theodore, 2017. "Local Authorities’ contribution on Gastronomy Tourism Development: the case of Ontario, Canada," MPRA Paper 79325, University Library of Munich, Germany.
    6. Badibanga, Thaddee Mutumba & Diao, Xinshen & Roe, Terry L. & Somwaru, Agapi, 2008. "Dynamics of Structural Transformation: Understanding the Key Factors That Drive Innovative Activities in Selected Asian and African Countries," Bulletins 43890, University of Minnesota, Economic Development Center.
    7. Rivera-Batiz, Luis A. & Romer, Paul M., 1991. "International trade with endogenous technological change," European Economic Review, Elsevier, vol. 35(4), pages 971-1001, May.
    8. van de Klundert, T.C.M.J., 1990. "Crowding out and the wealth of nations," Discussion Paper 1990-29, Tilburg University, Center for Economic Research.
    9. Frédéric Lordon, 1991. "Théorie de la croissance : quelques développements récents [Deuxième partie : la redécouverte des rendements croissants]," Revue de l'OFCE, Programme National Persée, vol. 37(1), pages 191-243.
    10. Tudose Mihaela Brindusa & Cadiş Mihaela Narciza, 2013. "The Role Of Education In The Economic Development," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 85-92, August.
    11. Xavier Sala-i-Martin, 1990. "Lecture Notes on Economic Growth(II): Five Prototype Models of Endogenous Growth," NBER Working Papers 3564, National Bureau of Economic Research, Inc.
    12. Ozturk, Ilhan, 2001. "The role of education in economic development: a theoretical perspective," MPRA Paper 9023, University Library of Munich, Germany.
    13. Young, Ralph, 1993. "Economics of Innovation: Black Hole or Positive Sum?," 1993 Conference (37th), February 9-11, 1993, Sydney, Australia 147920, Australian Agricultural and Resource Economics Society.
    14. Asli Seda Bilman & Serdar Turkeli, 2013. "Interaction between international trade and economic growth: Evidence from qualitative comparative analysis," International Economics Letters, Transnational Press London, UK, vol. 2(4), pages 5-18, December.
    15. Padoan, Pier Carlo, 1998. "Trade, knowledge accumulation and diffusion: A sectoral perspective1," Structural Change and Economic Dynamics, Elsevier, vol. 9(3), pages 349-372, September.
    16. Badibanga, Thaddee & Diao, Xinshen & Roe, Terry & Somwaru, Agapi, 2009. "Dynamics of structural transformation: An empirical characterization in the case of China, Malaysia, and Ghana," IFPRI discussion papers 856, International Food Policy Research Institute (IFPRI).
    17. Faiza Umer & Shaista Alam, 2013. "Effect of Openness to Trade and FDI on Industrial Sector Growth: A Case Study for Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(48), pages 179-198, June.
    18. Padoan, Pier Carlo, 1996. "Trade and the accumulation and diffusion of knowledge," Policy Research Working Paper Series 1679, The World Bank.

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