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Helping thy neighbour: productivity, welfare and international trade

  • Niek Nahuis

    (Ministry of Finance, The Hague, The Netherlands)

  • Ben Geurts

    (Ministry of Finance, The Hague, The Netherlands)

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.

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Paper provided by EconWPA in its series International Trade with number 0404008.

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Length: 14 pages
Date of creation: 09 Apr 2004
Date of revision:
Handle: RePEc:wpa:wuwpit:0404008
Note: Type of Document - pdf; pages: 14
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  1. Daron Acemoglu & Jaume Ventura, 2001. "The World Income Distribution," NBER Working Papers 8083, National Bureau of Economic Research, Inc.
  2. 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, 09.
  3. Martine Durand & Jacques Simon & Colin Webb, 1992. "OECD's Indicators of International Trade and Competitiveness," OECD Economics Department Working Papers 120, OECD Publishing.
  4. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  5. 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.
  6. Tamim Bayoumi & Maarkus Haacker, 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.
  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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