Introduction

Trade theory suggests that the more efficient utilization of productive resources following trade liberalization will lead to a one-time (static) increase in gross domestic product (GDP). Depending on country size and the nature of competition, terms-of-trade effects and scale effects may magnify or even reverse the sign of these static efficiency gains. On top of the static impact, growth theory suggests the potential for a medium-run growth effect as static gains induce changes in savings and investment patterns. These effects are referred to by Baldwin and Venables (1995) as accumulation effects. The magnitude and direction of such effects depend on the assumed underlying savings behaviour (fixed savings, fixed time discount factors, overlapping generations, etc). These medium-run effects are different from the long-run, permanent growth effects emphasized in the new growth literature. They are grounded firmly in the capital accumulation mechanisms highlighted in classical growth theory and are not dependent on the dynamic externalities featured in the new growth theory. In this chapter, capital accumulation effects are explored in a general equilibrium context. Emphasis is placed on comparison of steady states. The explicit modeling of optimization-based transition dynamics is covered in Chapter 13.

Trade and Growth: Some Background

The gains from trade in static, perfectly competitive models stem from the increased efficiency of resource allocation and improved consumption pos- sibilities. In static models with imperfect competition, additional gains from trade may result from increasing returns to scale, as firms realize internal scale economies, and from increased product and input variety for consumers and producers, respectively.