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Trade Liberalization, Growth, and Productivity

  • Timothy J. Kehoe

    (University of Minnesota)

  • Mark J. Gibson

    (Washington State University)

  • Kim J. Ruhl

    (Stern School, New York University)

  • Claustre Bajna

    (Ryerson University)

We investigate the theoretical relationship between trade policy and growth. We use simple versions of some of the most common international trade models to investigate a number of specific mechanisms by which trade liberalization is thought to enhance growth or productivity: improvements in the terms of trade, increases in product variety, reallocation toward more productive firms, and an increased incentive to accumulate capital. In each model, trade liberalization improves social welfare. This is to be expected, but our results on real GDP may come as a surprise. In the static models, there is no general connection between trade liberalization and increases in real GDP per capita â the relationship may even be negative. In a dynamic model with capital accumulation, some countries will have slower rates of growth under free trade than under autarky. Opening to trade improves welfare, but does not necessarily increase real GDP per capita or speed up growth. If openness does in fact lead to large increases in real GDP, these increases do not come from the standard mechanisms of international trade.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 794.

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Date of creation: 2011
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Handle: RePEc:red:sed011:794
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Diewart, W Erwin & Morrison, Catherine J, 1986. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," Economic Journal, Royal Economic Society, vol. 96(383), pages 659-79, September.
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