International trade and SOLOW model

 Though all the theories and models of international trade so far discussed were highlighted the direct effect of international trade, new growth models which were mainly based on Solow growth model reflect effect and impact of trade on economic growth of any particular country. According to SOLOW model, international trade can change an economy’s stationary state in the short run and economic growth in the medium- run as the economy moves from one steady to another. The model of increasing returns to scale indicate that trade increases the real value of goods available to consumers by producing more goods which has comparative advantage and importing goods which lack comparative advantage. Richard Baldwin interpreted this as an increase of production function, as increase in the value of real goods produced . Joy Mazumdar qualified Baldwin’s idea by pointing out that a country may not be able to increase its rate of growth in the medium term if it exports capital goods and imports consumer goods . Thus, according to Mazumdar’s idea, Baldwin’s application of the SOLOW model to international trade suggests that capital importing developing countries might gain more from international trade than developed economies.

References

            Solow, Robert.  “A contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, 1995 16Vol. 70(1): pp 65-94.

            Baldwin E. Richard. “Measurable Dynamic gains in Trade,” Journal of political Economy, 1992(100)11:  162-174.

            Mazmdar Joy “Do static gains from trade lead to medium run growth,” Journal of political Economy, 1996: 104(6).

            Hendrik Van Den Beng. Economic Growth and Development, Chapters 4, 5 and 6,   McGraHill: 2001 pp114-211