Trade and growth: a simple model with not-so-simple implications (Q520971)

This paper deals with a model of international trade and growth. The proposed model is a blend of a two-sector Ricardian model, where trade is driven by differences in technology (comparative advantage) and capital is the only factor of production, and the Harrod-Domar-Rebelo model of endogenous growth, in which consumption is linear with income. The author considers two countries, \(A\) and \(B\), and two goods: a consumption good and a capital good. Capital is assumed to be immobile between countries and it is assumed that the output is produced by means of capital alone. The production takes place under constant returns to scale. Country \(A\) (resp. \(B\)) has a comparative advantage in the production of the capital (resp. consumption) good. In the proposed model, the equilibrium is unique and can exist in three possible regimes: 1) Both countries completely specialize, 2) only the country with a comparative advantage in consumption goods (country \(B\)) specializes, 3) only the country with a comparative advantage in capital goods (country \(A\)) specializes. It is found that the growth rate of country \(A\) is the same in the three regimes. But the growth rate of country \(B\) is different in each of these regimes. The dynamics of the model follows three possible trajectories. Each of these trajectories ends in one of the above regimes, irrespective of the initial capital stock.