The neoclassical growth model, for long the primary theoretical framework for examining issues related to economic growth, has undergone a period of extensive reappraisal over the past decade. Its predictions of income convergence have been subject to a broad array of empirical tests, as has the model's underlying assumption of constant exogenous growth. While the convergence predictions have received varying degrees of empirical support - from unconditional convergence among the more developed economies to conditional convergence within broader sets of countries - the evidence on long-run growth rates presents the standard neoclassical model with one of its more problematic encounters with the stylised facts. While growth rates do appear to be relatively constant over extended periods of time, they have exhibited steady increases over the past few centuries. Secondly, growth increases during this century have also coincided with greater exposure to foreign competition by the countries that have experienced the greatest increases in growth rates.

In Discussion Paper No. 1335, Research Fellow Dan Ben-David and Michael B Loewy present a model that preserves many of the primary features of the standard neoclassical model, while introducing some modifications that transform it into an open economy endogenous growth model with knowledge accumulation. Knowledge accumulation is determined in part by the extent of knowledge spillovers from abroad and the extent to which each country is exposed to the knowledge stocks of other countries. The degree of this exposure is assumed to be directly related to the level of external trade – which implies that commercial policy can affect economic growth. In particular, unilateral trade liberalisation may increase steady-state income growth in all countries. The reduction of tariffs by one or more countries leads to faster steady state by all.