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Dynamic gains from trade: Does it matter what is imported?

Joshua J Lewer, University of Nebraska - Lincoln


International trade theory provides a solid foundation for reviewing the static gains from trade and the losses brought about from protectionism. Empirical results have also reinforced trade theory by finding a positive and significant relationship between trade growth rates and GDP growth rates. Unfortunately, international trade theory is largely static in nature and, therefore, provides very little indication as to the possible large dynamic effects of trade that have been captured by the empirical studies. ^ One exception has been Richard Baldwin (1992), who incorporates the gains from comparative advantage into the Solow growth model. He argues that regardless of what is traded in the export and import sector, significant medium-run gains from foreign exchange occur in the form of capital accumulation. Joy Mazumdar (1996) asserts that international trade will bestow an immediate income gain, but maintains that medium-run growth depends on trade composition. Medium-run transition in the Solow model is related to the process of capital formation, and the price of capital relative to consumer goods depends critically on whether capital is an import good or the export good. Mazumdar suggests that countries which import consumption goods and export capital goods find it difficult to experience medium-run growth because of increased depreciation expenditure, while countries that import capital and export consumption goods reach an even higher steady state than what Baldwin predicted. ^ This dissertation rigorously tests the hypothesis that international trade composition matters for medium-run growth for 28 selected countries. A trade composition variable is created for each country by using export and import data of both consumption and capital goods. By incorporating this variable into a linear regression equation, several empirical tests are performed. Econometric techniques used in this dissertation include unit root testing, single-equation estimation, simultaneous equation estimation, vector autoregression, cointegration testing, error-correction estimation, and panel data estimation. The empirical results are suggestive, and indicate some support for Mazumdar's qualification. ^

Subject Area

Economics, General

Recommended Citation

Lewer, Joshua J, "Dynamic gains from trade: Does it matter what is imported?" (2000). ETD collection for University of Nebraska - Lincoln. AAI9973597.