Two of the most interesting facts of the postwar international growth experience are (1) the conditional convergence finding that, after controlling for measures of education and government policies, poor countries tend to grow faster than rich ones; and (2) a small group of export-oriented economies in East Asia have been able to grow at rates that are so high that they defy historical comparisons. This paper shows that it is possible to explain these facts by combining a weak form of the factor-price-equalization theorem of international trade with the Ramsey model of economic growth.᭧ 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

We show that even in the absence of diminishing returns in production and technological

We develop a stylized model of economic growth with bubbles in which changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. These bubbles mitigate the effects of financial frictions. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. These transfers of resources improve economic efficiency thereby expanding consumption, the capital stock and output. When bubbly episodes end, there is a fall in consumption, the capital stock and output. We argue that the stochastic equilibria of the model provide a natural way of introducing bubble shocks into business cycle models. (JEL E22, E23, E32, E44, O41)

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