ECONOMIC DEVELOPMENT UNDER ALTERNATIVE TRADE REGIMES*

doi:10.1111/j.1468-2354.2006.00391.x

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Wiley InterScience

International Economic Review

Volume 47 Issue 2, Pages 611 - 649

Published Online: 11 Apr 2006

Published on behalf of the University of Pennsylvania and Osaka University

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ECONOMIC DEVELOPMENT UNDER ALTERNATIVE TRADE REGIMES*

Rui Castro †¹

†Department of Economics and CIREQ, Université de Montréal, Canada

* Manuscript received November 2003; revised August 2004.

¹ I wish to thank the editor, José-Víctor Ríos-Rull, as well as two anonymous referees for very detailed and helpful comments. I also thank Per Krusell for his guidance and many helpful suggestions, Rui Albuquerque, Daniele Coen-Pirani, Jeremy Greenwood, and seminar participants at McGill University, Michigan State University, Universidade de Aveiro, Université de Montréal, Federal Reserve Bank of Dallas, 2000 Rochester Wegmans conference, 2001 meetings of the Society for Economic Dynamics in Stockholm, 2002 North American Summer meetings of the Econometric Society in Los Angeles, 2002 CMSG meetings in Kingston, and 2003 Federal Reserve Bank of Cleveland Conference on Trade, Capital Flows and Aggregate Dynamics. All remaining errors are mine. Financial support from Praxis XXI is gratefully acknowledged. Please address correspondence to: Rui Castro, Department of Economics and CIREQ, Université de Montréal, C.P. 6128, succ. Centre-Ville, Montréal, QC H3C 3J7, Canada. E-mail: rui.castro@umontreal.ca.

ABSTRACT

How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.

Received: 2003; First Revision: 2004;

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-2354.2006.00391.x About DOI