Trade Liberalization and Heterogeneous Rates of Time Preference across Countries: A Possibility of Trade Deficits with China

Harashima, Taiji (2009): Trade Liberalization and Heterogeneous Rates of Time Preference across Countries: A Possibility of Trade Deficits with China.

Abstract

Strategies for trade liberalization when the rates of time preference are heterogeneous across countries are examined in the framework of endogenous growth. The paper argues that the best strategy for a country with the relatively higher rate of time preference is the strategy of free trade with wielding market power if the country is large enough to wield market power because all the optimality conditions are satisfied in this case. By this strategy, the current account of the country shows persisting surpluses, which implies a possibility that China has taken this strategy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade Liberalization; Time preference; Heterogeneity; Trade deficits; China
• Subjects: F - International Economics > F1 - Trade > F10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

References

Aghion, Philippe and Peter Howitt. (1998). Endogenous Growth Theory, Cambridge, MA, MIT Press.

Becker, Robert A. (1980). “On the long-run steady state in a simple dynamic model of equilibrium with heterogeneous households,” The Quarterly Journal of Economics, Vol. 95, 375-382.

Cuesta, Mauricio, Gerald Carlson, and Ernst Lutz. (1997). An Empirical Assessment of Farmers’ Discount Rates in Costa Rica, Environment Department, World Bank, Washington D.C.

Dollar, David and Aart Kraay. (2004). “Trade, Growth, and Poverty,” The Economic Journal, Vol. 114, pp. F22-F49.

Easterly, W. and R. Levine. (2001). “It’s not factor accumulation: stylized facts and growth models,” The World Bank Economic Review, Vol. 15(2), pp. 177-220.

Farmer, Roger E. A. and Amartya Lahiri. (2004). “Recursive Preferences and Balanced Growth,” mimeo.

Ghiglino, Christian. (2002). “Introduction to a General Equilibrium Approach to Economic Growth,” Journal of Economic Theory, Vol. 105, 1-17.

Harashima, Taiji. (2004). “A New Asymptotically Non-Scale Endogenous Growth Model,” EconWPA Working Papers, ewp-dev/0412009.

Harashima, Taiji. (2005). “Endogenous Growth Models in Open Economies: A Possibility of Permanent Current Account Deficits,” EconWPA Working Papers, ewp-it/ 0502001.

Jacobs, Jane. (1969). The Economy of Cities, Random House, New York.

Jones, Charles I. (1995a). “Time series test of endogenous growth models,” Quarterly Journal of Economics, Vol. 110, pp. 495-525.

Jones, Charles I. (1995b). “R&D-Based Models of Economic Growth,” Journal of Political Economy, Vol. 103, pp. 759-784.

Jones, Charles I. (2003). “Population and Ideas: A Theory of Endogenous Growth,” in P. Aghion, R. Frydman, J. Stiglitz and M. Woodford, eds., Knowledge, Information, and Expectations in Modern Macroeconomics: In honor of Edmund S. Phelps, Princeton University Press.

Kaldor, N. (1961). “Capital Accumulation and Economic Growth,” Chap. 10 of A. Lutz and D. C. Hague (eds.), The Theory of Capital, St. Martin’s Press, New York.

Lawrance, Emily C. (1991) “Poverty and the rate of time preference: evidence from panel data,” Journal of Political Economy, vol. 99, no. 1, 54-77.

Mink, S. D. (1993). “Poverty, Population and the Environment,” World Bank Discussion Paper 189, World Bank.

Pender, J. L. (1996). “Discount rates and credit markets: Theory and evidence from rural India,” Journal of Development Economics, Vol. 50, pp. 257-96.

Peretto, Pietro and Sjak Smulders. (2002). “Technological Distance, Growth and Scale Effects,” The Economic Journal, Vol. 112, pp. 603-624.

Romer, P. M. (1990). “Endogenous Technological Change,” Journal of Political Economy, Vol. 98, pp. S71-S102.

Sorger, Gerhard. (2002). “On the Long-run Distribution of Capital in the Ramsey Model,” Journal of Economic Theory, Vol. 105, 226-243.

Winters, L Alan. (2004). “Trade Liberalisation and Economic Performance: An Overview,” The Economic Journal, Vol. 114, pp. F4-F21.

World Bank. (1992). World Development Report 1992. Development and the Environment, Oxford University Press, New York.