Table Of ContentSpringer Texts in Business and Economics
Karl Farmer
Matthias Schelnast
Growth and
International Trade
An Introduction to the Overlapping
Generations Approach
Second Edition
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Karl Farmer Matthias Schelnast
Growth and International
Trade
An Introduction to the Overlapping
Generations Approach
Second Edition
KarlFarmer MatthiasSchelnast
DepartmentofEconomics DepartmentofEconomics
UniversityofGraz UniversityofGraz
Graz,Austria Graz,Austria
ISSN2192-4333 ISSN2192-4341 (electronic)
SpringerTextsinBusinessandEconomics
ISBN978-3-662-62942-0 ISBN978-3-662-62943-7 (eBook)
https://doi.org/10.1007/978-3-662-62943-7
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Preface to the Second Edition
Thesecondeditionofthetextbookathandcontains—comparedtothefirstedition—
four more chapters on growth and international trade from the Diamond-type
overlappinggenerations(OLG)perspective.InPartI,“Growth”,involuntaryunem-
ploymentinintertemporalgeneralequilibriumunderflexiblepricesandwagesisthe
subject of a new chapter (Chap. 9). Robots, investment in human capital, and
unemployment in a digital world economy are dealt with in Chap. 10, which now
concludes Part I. The empirical data in other chapters of Part I, in particular in
Chap. 1,areupdated,minorerrors arecorrected, andthewholetext ischecked for
the sake of internal consistency. Part I of this second edition comprises fifty-fifty
introductory and advanced material. This is also true for Part II, “International
Trade”,whichisalsoextendedbytwonewChaps.21and22.InChap.21,financial
integrationandhousepricedynamicsaredepictedinaglobalOLGwithintra-EMU
and Asian–US trade imbalances. The final chapter (Chap. 22) extends the closed
economy of Chap. 7 towards a two-country, open-economy model in order to
explain why religion might persist in a globalized world economy. Empirical data
inPartIIarealsoupdated,minorerrorsarecorrected,andthewholetextisexamined
forinternalconsistency.
Asindicatedbythebook’ssubtitle,itwastheauthors’intentiontointroducethe
conceptoftheoverlappinggenerationsapproachtogrowthandinternationaltradeto
amuchwideraudience.Whatwassaidintheprefacetothefirsteditionisalsotrue
for the new chapters of the second edition. Nonetheless, the approach taken in the
newchaptersremainsrelativelyintroductoryinthatutilityandproductionfunctions
arespecifiedinsuchawaythatanyinterestedreadershouldbecapableofderiving
solutions to the intertemporal general equilibria described. However, our primary
intention is not simply to hone skills in general equilibrium solutions but rather to
improve the reader’s ability to grasp the analytical significance of the much more
advanced dynamic general equilibrium models (on growth and international trade)
publishedinleadingjournals.
The second edition of the textbook at hand represents a thoroughly revised and
substantially extended version of Wachstum und Außenhandel, co-authored by
RonaldWendnerandfirstpublishedinGermanin1997andthenasasecondedition
in1999.ThenewlyaddedchaptersinPartIarebasedonthefirstauthor’spreviously
published work (in cooperation with Stefan Kuplen), while Chaps. 21 and 22 are
v
vi PrefacetotheSecondEdition
basedonpreviouslypublishedworkofthefirstauthor.Whilebothauthorsvouchfor
theaccuracyofallthechapters,themajoronusofresponsibilityrestsclearlywiththe
firstauthor.
Acknowledgment Niko Chtouris, the Associate Editor for books in Economics
andPoliticalScience,initiatedtherevisionofGrowthandInternationalTrade.We
areverygratefultohimforthisinitiativeandforhisexcellentcooperationduringthe
revisionprocess.
Graz,Austria KarlFarmer
September2020 MatthiasSchelnast
Preface to the First Edition
This textbook contains introductory and rather advanced topics on growth and
international trade from the Diamond-type overlapping generations perspective.
PartI,“Growth”,comprisesmainly,althoughnotexclusively,introductorymaterial.
This is also true for Part II, “International Trade”, but to a much lesser extent. In
PartI,theunifiedanalyticalapproachofDiamond’s(1965)overlappinggenerations
model toneoclassical(“old”)and“new”growththeories (R&D andhuman capital
approaches) figures prominently. Chapters 2 and 3 exhibit the basic overlapping
generations model of the world economy, its intertemporal equilibrium dynamics,
andsteady-stategrowth.DiscussionofpublicdebtinChap.4andeconomicgrowth
under exogenous and endogenous conditions of technological change in Chaps. 5
and6andadescriptionofthefactors(religionincluded)determininghumancapital
formationinChap.7arebothexpectedtoattracttheinterestofthereader.Giventhe
presenteconomicclimate,thechapterconcludingPartI,on“GrowthwithBubbles”,
willlikelybeparticularlyinteresting.ThefirstthreechaptersinPartIIaredevotedto
thepresentationofanintertemporalequilibriumversionofneoclassical(Heckscher-
Ohlin) trade theory, including a neoclassical model on globalization. Further two
chapters focus on international trade under imperfect competition and on product
differentiation under exogenous and endogenous technological change. The
remaining five chapters of Part II contain recent research results obtained by the
firstauthorincooperationwithbothBirgitBednar-Friedlandthesecondauthor.The
first two of these chapters deal with the existence of limits to national debt and
international effects of debt reduction in advanced countries. The international
impact of unilateral climate policy on capital accumulation and welfare and the
determination of an optimum climate policy from a unilateral and a multilateral
perspective are investigated in the next two chapters. The final chapter in Part II
looksattheinternaldebtmechanicsleadingtotherecentcrisisintheeurozone.
Asindicatedbythebook’ssubtitle,itwastheauthors’intentiontointroducethe
conceptoftheoverlappinggenerationsapproachtogrowthandinternationaltradeto
amuchwideraudience.Theapproachtakenisrelativelyintroductoryinthatutility
and production functions are specified in such a way that any interested reader
should be capable of deriving solutions to the intertemporal general equilibria
vii
viii PrefacetotheFirstEdition
described. However, our primary intention is not simply to hone skills in general
equilibriumsolutionsbutrathertoimprovethereader’sabilitytograsptheanalytical
significance of the much more advanced dynamic general equilibrium models
(ongrowthandinternationaltrade)publishedinleadingjournals.
Thisbookrepresentsathoroughlyrevisedandsubstantiallyextendedversionof
WachstumundAußenhandel,co-authoredbyRonaldWendnerandfirstpublishedin
Germanin1997andthenasasecondeditionin1999.Asmentionedabove,thelast
four chapters of Part II are based on the first author’s previously published work
(incooperationwithBirgitBednar-Friedl),whileChaps.8and15arebasedonjoint
work of the present authors. While both authors vouch for the accuracy of all the
chapters,themajoronusofresponsibilityrestsclearlywiththefirstauthor.
Acknowledgments Several people have helped us over the long period of
gestationneededtocompletethiswork.First,weareparticularlygratefultoLaurie
ConwayandIngeborgStadlerfortheirexcellentlanguagecheck.Lauriemadesuch
substantialrevisionstoseveralchaptersthattosomeextenthecouldevenbeseenas
co-author.WearealsogratefultoAnitaSchewczik-PauritschandCorinnaBlaschfor
carefulproofreading.Lastbutnotleast,wethankDr.MartinaBihnandBarbaraFess
from Springer for encouraging us to revise Wachstum und Außenhandel and for
acceptingthemanuscriptforpublication.
Authoring a book is a highly demanding exercise for all those concerned. We
bothoweaconsiderabledebtofgratitudetoallthoseamongourfamilyandfriends
whorepeatedlyofferedustheirpatienceandsupportoverthelastfewmonths.
Graz,Austria KarlFarmer
August2012 MatthiasSchelnast
Contents
1 GrowthandInternationalTrade:Introduction
andStylizedFacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 IntroductionandMotivation. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 DefinitionofGrowthMagnitudes. . . . . . . . . . . . . . . . . . . . . . 3
1.2.1 GrowthRatesofProductsandQuotients. . . . . . . . . . 6
1.3 Kaldor’s“StylizedFacts”.. . . . . . . . . . . . .. . . . . . . . . . . .. . 7
1.4 Kuznets’Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 InternationalizationFacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5.1 WorldTradeIsGrowingFasterThanWorld
Output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.5.2 ExportandImportRatiosIncreaseOverTime. . . . . . 16
1.5.3 Two-ThirdsofForeignTradeTakesPlaceBetween
DevelopedCountries. . . . . . . . . . . . . . . . . . . . . . . . 18
1.5.4 NeighboringCountriesTradeMorewithEach
OtherThanCountriesThatAreFurtherApart. . . .. . . 20
1.6 GlobalizationFacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.6.1 ForeignDirectInvestmentandFinancial
Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.6.2 AsiaSincethe1970s:“The”DynamicExport
Region. . .. . . . . .. . . . . .. . . . . .. . . . . . .. . . . . .. 23
1.7 SummaryandConclusions. . . .. . . . . . . . . . .. . . . . . . . . . .. 23
1.8 Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PartI Growth
2 ModelingtheGrowthoftheWorldEconomy:TheBasic
OverlappingGenerationsModel. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.1 IntroductionandMotivation. . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.2 TheSet-UpoftheModelEconomy. . . . . . . . . . . . . . . . . . . . 32
2.3 TheMacroeconomicProductionFunctionandIts
PerCapitaVersion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.4 StructureoftheIntertemporalEquilibrium. . . . . . . . . . . . . . . 37
iixx
