The Transmission of Sustained Growth through the Terms of Trade in an Endogenous Growth Model

Abstract

This paper develops a two-country model of endogenous growth and international trade. In autarky just one of the countries is capable of generating growth. The trade situation may be characterized by complete or incomplete specialization. In either case, international trade transmits sustained growth to the stagnated economy simply because the terms of trade become each time more favorable to this country. The existence of a non-reproducible factor in the country that grows in autarky is crucial to ensure growth transmission. Moreover, under incomplete specialization the world economy behaves as an integrated economy, and countries converge in per capita income.

Population growth and north-south uneven development

“…The result that a country that is at a disadvantage in terms of production can attain sustainable growth through the terms of trade effect is also obtained in Felbermayr (2007) and Alvarez-Albelo and Perera-Tallo (2008). Felbermayr (2007) shows that even if the South specializes in a technologically stagnant sector, it can achieve sustainable growth owing to endogenous, continuous improvements in the term-of-trade.Álvarez-Albelo and Perera-Tallo (2008) also reach a similar result by using a different two-country endogenous growth model.…”

Specialization in Luxury Goods, Productivity Gaps and the Rapid Growth of Small Tourism Countries

“…2 In both models, we find that Country 2 overcomes decreasing returns and grows permanently because its terms of trade improve continuously. As shown in the literature on growth in open economies (for example, Diewert and Morrison, 1986;Álvarez-Albelo and Perera-Tallo, 2008), this occurs because there is an equivalence between terms of trade improvements and total factor productivity (TFP) increases. This finding is related to sectoral productivity gaps.…”