IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2970.html
   My bibliography  Save this paper

Growth and Welfare in A Small Open Economy

Author

Listed:
  • Gene M. Grossman
  • Elhanan Helpman

Abstract

We construct a model of growth based on endogenous technological change in a small, open economy. Entrepreneurs develop new intermediate products whenever the present value of potential profits exceeds the cost of R&D. Diversity of intermediates contributes to total factor productivity in the production of final goods. The economy produces two such final goods, and trades these at exogenously given world prices. We study the welfare implications of R&D subsidies and commercial policy. There exists an optimal subsidy to R&D that speeds growth relative to the market-determined rate. The optimal subsidy achieves the first-best rate of growth, but not the first-best level of welfare. Small tariffs and export subsidies also affect both growth and welfare. Growth may increase or decrease, depending upon which sector is promoted by the trade policy. But an increase in the growth rate is neither necessary nor sufficient for a trade policy to improve welfare. Finally, we compare tariffs and quotas, when the latter give rise to rent-seeking behavior. The diversion of resources from innovative activities to rent seeking can have dire implications for growth and welfare.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman, 1989. "Growth and Welfare in A Small Open Economy," NBER Working Papers 2970, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2970
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2970.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Grossman, Gene M & Helpman, Elhanan, 1990. "Comparative Advantage and Long-run Growth," American Economic Review, American Economic Association, vol. 80(4), pages 796-815, September.
    2. Baumol, William J., 1988. "Entrepreneurship: Productive, Unproductive and Imitative: or the Rule of the Rules of the Game," Working Papers 88-07, C.V. Starr Center for Applied Economics, New York University.
    3. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    5. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van de Klundert, T.C.M.J. & Smulders, J.A., 1993. "Reconstructing growth theory : A survey," Other publications TiSEM ed4275fb-b14f-4175-a63f-6, Tilburg University, School of Economics and Management.
    2. Andrea Brasili & Paolo Epifani & Rodolfo Helg, 1999. "On the dynamics of trade patterns," LIUC Papers in Economics 61, Cattaneo University (LIUC).
    3. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 645-661.
    4. Klaus Waelde, 1994. "Trade pattern reversal: The role of technological change, factor accumulation and government intervention," International Trade 9403003, University Library of Munich, Germany, revised 06 Apr 1994.
    5. Ziesemer, Thomas, 1990. "Optimal Subsidization and Structural Change under Monopolistic Competition with Technical Progress a la Ethier," MPRA Paper 64500, University Library of Munich, Germany.
    6. Martin Neil Baily & Charles L. Schultze, 1990. "The Productivity of Capital in a Period of Slower Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 369-420.
    7. Siebert, Horst, 1991. "A Schumpeterian model of growth in the world economy: some notes on a new paradigm in international economics," Open Access Publications from Kiel Institute for the World Economy 1498, Kiel Institute for the World Economy (IfW Kiel).
    8. MARTINS, Ana Paula, 2015. "Increasing Returns And Endogenous Growth: Market Size And Taste For Variety," Academica Science Journal, Economica Series, Dimitrie Cantemir University, Faculty of Economical Science, vol. 1(5), pages 3-33, June.
    9. Bode, Eckhardt, 1996. "Ursachen regionaler Wachstumsunterschiede: wachstumstheoretische Erklärungsansätze," Kiel Working Papers 740, Kiel Institute for the World Economy (IfW Kiel).
    10. Raphaël Chiappini, 2014. "Persistence vs. mobility in industrial and technological specialisations: evidence from 11 Euro area countries," Journal of Evolutionary Economics, Springer, vol. 24(1), pages 159-187, January.
    11. James R. Markusen, 1990. "First Mover Advantages, Blockaded Entry, And the Economics of Uneven Development," NBER Working Papers 3284, National Bureau of Economic Research, Inc.
    12. Feenstra, Robert C., 1996. "Trade and uneven growth," Journal of Development Economics, Elsevier, vol. 49(1), pages 229-256, April.
    13. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    14. Goo, Youngwan & Park, Hyun, 2007. "Economic growth and convergence with international differences in technology," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 145-168, March.
    15. Daniele Schilirò, 2019. "The Growth Conundrum: Paul Romer’s Endogenous Growth," International Business Research, Canadian Center of Science and Education, vol. 12(10), pages 75-85, October.
    16. William Darity & Lewis S. Davis, 2005. "Growth, trade and uneven development," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 29(1), pages 141-170, January.
    17. Sala-i-Martin, Xavier, 1990. "Lecture Notes on Economic Growth: Five Prototype Models of Endogenous Growth. Volume II," Center Discussion Papers 321324, Yale University, Economic Growth Center.
    18. Mo, Pak Hung, 2011. "Institutions, Entrepreneurship and Channels to Sustained Economic Growth," MPRA Paper 28911, University Library of Munich, Germany.
    19. Fan, Fei & Dai, Shangze & Yang, Bo & Ke, Haiqian, 2023. "Urban density, directed technological change, and carbon intensity: An empirical study based on Chinese cities," Technology in Society, Elsevier, vol. 72(C).
    20. Jeffrey D. Sachs & Xiaokai Yang & Dingsheng Zhang, 1999. "Trade Pattern and Economic Development when Endogenous and Exogenous Comparative Advantages Coexist," CID Working Papers 03A, Center for International Development at Harvard University.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2970. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.