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Helping thy neighbour: productivity, welfare and international trade

Author

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  • Niek Nahuis

    (Ministry of Finance, The Hague, The Netherlands)

  • Ben Geurts

    (Ministry of Finance, The Hague, The Netherlands)

Abstract

We describe the relation between welfare growth and productivity growth. We argue that differences in productivity and productivity growth between sectors or countries are irrelevant from a policy perspective. Specialisation is based on the comparative advantages of countries. Since, by nature, some sectors witness higher productivity growth than others, so do countries. Although, at the global level, productivity growth and welfare growth are two sides of the same coin, at the national level they are not. The welfare effects of productivity growth in part leak away to consumers in other countries because technological progress is translated into a decline of export prices relative to import prices. Or stated differently, importing countries benefit from the lower prices due to technological innovations in exporting countries. These terms of trade effects of productivity growth on welfare do not only exist in theory. Empirically, we find significant and large terms of trade effects. Our overall conclusion is that once this trade perspective is taken into account, productivity is less attractive as a primary policy goal for governments. The primary task for governments is rather to create an environment in which private agents can explore the comparative advantages they have.

Suggested Citation

  • Niek Nahuis & Ben Geurts, 2004. "Helping thy neighbour: productivity, welfare and international trade," International Trade 0404008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpit:0404008
    Note: Type of Document - pdf; pages: 14
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/it/papers/0404/0404008.pdf
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Bayoumi, Tamim & Haacker, Maarkus, 2002. "It's not what you make, it's how you use IT: measuring the welfare benefits of the IT revolution across countries," LSE Research Online Documents on Economics 20066, London School of Economics and Political Science, LSE Library.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Daron Acemoglu & Jaume Ventura, 2002. "The World Income Distribution," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 659-694.
    5. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 1064-1093, September.
    6. Martine Durand & Jacques Simon & Colin Webb, 1992. "OECD's Indicators of International Trade and Competitiveness," OECD Economics Department Working Papers 120, OECD Publishing.
    7. Bart van Ark, 2001. "The Renewal of the Old Economy: An International Comparative Perspective," OECD Science, Technology and Industry Working Papers 2001/5, OECD Publishing.
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    Cited by:

    1. repec:use:tkiwps:2222 is not listed on IDEAS
    2. R. Nahuis & H. van der Wiel, 2005. "How Should Europe’s ICT Ambitions look like? An Interpretative Review of the Facts," Working Papers 05-22, Utrecht School of Economics.

    More about this item

    Keywords

    welfare; comparative advantages; terms of trade; productivity; economic policy;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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