DP2234 | Complementarity, Growth and Trade

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We consider an endogenous growth model that includes international trade in capital goods. The model yields several distinct balanced growth solutions that can be classified using stability under adaptive learning. Some of the equilibria can involve growth rates much higher (or lower) than others. The impact of international trade on the equilibria include local (differential) effects and global bifurcation (global) changes. If a favourable bifurcation occurs, equilibria associated with low growth disappear. This phenomenon suggests a possible explanation for observations in which active international trade by some countries seems to have been associated with periods of exceptionally high growth. We show that equivalent bifurcation effects can be induced in autarky using domestic industry subsidies. However, such subsidization can be very costly.