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Explaining High Economic Growth in Small Tourism Countries with a Dynamic General Equilibrium Model

  • Carmen Álvarez-Albelo

    ()

    (Grup de Recerca en Economia del Benestar (CREB), Department of Economic Analysis, University of La Laguna)

  • Raúl Hernández-Martín

    (Department of Applied Economics, University of La Laguna)

Registered author(s):

    This paper shows that tourism specialisation can help to explain the observed high growth rates of small countries. For this purpose, two models of growth and trade are constructed to represent the trade relations between two countries. One of the countries is large, rich, has an own source of sustained growth and produces a tradable capital good. The other is a small poor economy, which does not have an own engine of growth and produces tradable tourism services. The poor country exports tourism services to and imports capital goods from the rich economy. In one model tourism is a luxury good, while in the other the expenditure elasticity of tourism imports is unitary. Two main results are obtained. In the long run, the tourism country overcomes decreasing returns and permanently grows because its terms of trade continuously improve. Since the tourism sector is relatively less productive than the capital good sector, tourism services become relatively scarcer and hence more expensive than the capital good. Moreover, along the transition the growth rate of the tourism economy holds well above the one of the rich country for a long time. The growth rate differential between countries is particularly high when tourism is a luxury good. In this case, there is a faster increase in the tourism demand. As a result, investment of the small economy is boosted and its terms of trade highly improve.

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    File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/XREAP2007-06.pdf
    File Function: First version, 2007
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    File URL: http://www.pcb.ub.es/xreap/aplicacio/fitxers/XREAP2007-06.pdf
    File Function: Revised version, 2007
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    Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2007-06.

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    Length: 49 pages
    Date of creation: Jul 2007
    Date of revision: Jul 2007
    Handle: RePEc:xrp:wpaper:xreap2007-06
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    1. Carmen Dolores �lvarez-Albelo & Fernando Perera-Tallo, 2008. "The Transmission of Sustained Growth through the Terms of Trade in an Endogenous Growth Model," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 386-396, 05.
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