"Dynamic Gains from Trade and
presented at the conference on "Dynamics, Economic Growth, and International Trade, III" August 24-26, 1998, Academia Sinica, Taiwan.
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This model is used to study the effects of trade between two economies with similar structures. It is shown that trade and the pattern of production depends not only on the characteristics of the economies such as technologies, preferences, knowledge accumulation rates, and labor force endowments, but also on the timing of trade. There are some cases in which the pattern of trade changes and some cases in which the economy exports the "wrong" good in the sense that the actual pattern of trade is not the same as what it would be should no trade be allowed in the first place.
It is shown that whether
free trade is beneficial to a small open economy in the
long run depends on what good is being produced and
exported, and also on when free trade is first allowed.
Thus free trade may be be good. This paper also derives
the optimal timing of trade and the optimal production
subsidy in the presence of trade.
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This page was last revised on January 24, 2000.