We formulate a two-country, continuum-good Ricardian model of trade and endogenous growth with endogenous trade status. After establishing the existence, uniqueness, and global stability of a balanced growth path, we show that, compared with the old balanced growth path, a permanent fall in the trade cost in any one country: (i) raises the growth rates of capital in all countries for all periods; (ii) increases both the range of the imported varieties and that of the exported varieties in all countries for all periods; and (iii) raises welfare in all countries. Our theoretical predictions are qualitatively consistent with the empirical evidence.
ASJC Scopus subject areas
- Economics and Econometrics