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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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    References listed on IDEAS

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    Cited by:

    1. Rob Alessie & Agar Brugiavini & Guglielmo Weber, 2006. "Saving and Cohabitation: The Economic Consequences of Living with One's Parents in Italy and the Netherlands," NBER Chapters, in: NBER International Seminar on Macroeconomics 2004, pages 413-457, National Bureau of Economic Research, Inc.
    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.

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    More about this item

    Keywords

    welfare; comparative advantages; terms of trade; productivity; economic policy;
    All these keywords.

    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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