DP1183 Free Trade and Long-Run Growth

Author(s): Dan Ben-David, Michael B Loewy
Publication Date: May 1995
Keyword(s): Economic Growth, International Trade, Knowledge Diffusion, Trade Liberalization
JEL(s): E60, F10, F43, O30
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1183

What is the impact of movement towards free trade on output? Can this impact permanently affect output levels, and more importantly, will it have an impact on steady-state growth rates? This paper provides empirical evidence showing how countries have exhibited substantial increases in their growth rates over the past century while concurrently increasing the extent of their trade. The model developed here emphasizes the role that knowledge spillovers emanating from heightened trade can have on long-run growth rates. Among the results of the model, unilateral liberalization by one country will generate a positive impact on the steady-state growth of all its partners while at the same time inducing a level effect on the liberalizing country that reduces the income gap between it and other, wealthier, countries. In some cases, the liberalizing country may even leapfrog over initially wealthier countries.