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Free Trade, Growth, and Convergence

  • Dan Ben-David
  • Michael B. Loewy

What is the impact on output of movement towards free trade? Can trade liberalization have a permanent effect on output levels, and more importantly, does it have an impact on steady-state growth rates? The model developed here emphasizes the role" that knowledge spillovers emanating from heightened trade can have in income convergence and growth rates over the long run. The model also facilitates an analysis of the dynamic behavior of income levels and terms of trade as well as growth rates during the transition between steady states. Among the results of the model, unilateral liberalization by one country induces a level effect on the liberalizing country that reduces the income gap between it and other wealthier countries. In some cases, the liberalizing country may even leapfrog over initially wealthier countries. From the long-run growth perspective, unilateral (and multilateral) liberalization generates a positive impact on the steady-state growth of all the trading countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6095.

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Date of creation: Jul 1997
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Publication status: published as Journal of Economic Growth, vol. 3, July 1998, pp. 143-70.
Handle: RePEc:nbr:nberwo:6095
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