Matthias Schelnast

Factor Proportion, Inter-Sectoral Trade, and Product Life Cycle

This chapter is devoted to work out main propositions of neoclassical trade theory in a temporary equilibrium of the two-country OLG model of the previous chapter. Mathematically spoken, the neoclassical trade theory consists of three lemmas and one proposition: the Stolper-Samuelson Theorem, the Rybczynski Theorem, the Heckscher-Ohlin-Samuelson Theorem and the Heckscher-Ohlin Theorem. We prove all these theorems by using the log-linear utility functions and the Cobb-Douglas production functions of our basic two-country OLG model without money and government bonds. We illustrate the main claims graphically and provide intuitive explanations for them. We also point out empirical limitations of the factor proportion theory (Leontief paradox) and present theoretical advancements like the neo-factor-proportion theory and the product-cycle hypothesis to cope with the restrictions of the basic theory.

Determinants of Maximum Sustainable Government Debt

Debt ratios around the globe differ quite radically between countries. Whereas Japan has maintained a debt–GDP ratio of more than 200 % for some years, significantly lower debt ratios in Europe have caused substantial difficulties for some countries, such as Greece. Therefore, one can suspect that the reasons for this difference in sustainable debt ratios are varying magnitudes of economic variables, such as savings rates, public expenditure shares, the output elasticity of capital, and the debt ratios of main trading partners.

Innovation, Growth and Trade in a Two-Country OLG Model

While international trade in produced commodities and services raise national welfare by exploiting comparative cost advantages and increasing the number of intermediate products, it is by no means clear how international trade raises the GDP growth rate, a conjecture widely held among lay persons. It is the objective of this chapter to introduce trade in intermediate goods into a two-country version of the OLG model of Chap. 6 in order to be able to analyze the growth-enhancing effects of international trade. It turns out that due to the cost-saving effect of a larger number of intermediate-product variants the price of final products steadily decreases and the growth rate of the final product rises compared to the autarky situation.

“New“ Growth Theory and Knowledge Externalities in Capital Accumulation

This chapter probes into the pioneering approach of the so-called “new” growth theory, i.e. Romer’s (Journal of Political Economy, 94, 1002–1037, 1986) knowledge externalities in private capital accumulation. After listing the empirical and theoretical shortcomings of the “old” growth theory, the main approaches of the new growth theory are briefly outlined. In Sect. 5.3, knowledge externalities associated with private capital accumulation are introduced into our basic OLG model and the fundamental equation of motion is then derived from the FOCs for utility and profit maximization, and under market clearing. In the subsequent section the deficiencies of the old growth theory are reconsidered from the perspective of the knowledge externalities of new growth theory. In Sect. 5.5, public debt is introduced in our new growth model and the effects of variation in the politically fixed net deficit ratio on capital and public debt are investigated. Finally, it is shown that stochastic shocks to total factor productivity in the CD production function, together with investment adjustment costs, can in fact generate GDP time-series which resemble empirical evidence.

Endogenous Technological Progress and Infinite Economic Growth

This chapter presents a neo-Schumpeterian OLG model of self-propelled growth of intermediate-product innovations and over time rising GDP rates. A one-period patent system generates monopoly rents for producers of recently innovated intermediate goods which serve together with competitively produced intermediates as inputs in final-good production. The rising variety of intermediates reduces the unit cost and the price of the final good which enables the financing of an ever-increasing rate of intermediate-product innovations by the savings of younger households. Growth in the OLG model of this chapter is attributed to a continuous innovation process driven by rational choices of short-lived agents.

Product Differentiation, Decreasing Costs, and Intra-sectoral Trade

This chapter leaves (neo-) classical trade theory in order to be able to address the astonishing phenomenon of enormous international trade among similarly developed industrialized countries. The traditional assumptions of perfect competition in all markets, of trade with standardized homogeneous goods and of constant returns to scale are replaced by monopolistic competition in output markets, product differentiation and decreasing average production costs. This change in the market and cost structure enables us to address intra-industry (intra-sectoral) trade among highly developed countries. In formalizing Linder’s (An essay on trade and transformation. New York: Wiley, 1961) pioneering work on a demand-oriented trade theory in line with the already classic Dixit-Stiglitz (American Economic Review, 67, 297–308, 1977) approach, we present a full-fledged monopolistic equilibrium solution with a 100 % of intra-sectoral trade.

Economic Growth and Public Debt in the World Economy

This chapter is devoted to the exploration of the relationship between public debt and economic growth in an extended version of the basic OLG growth model described in Chaps. 2 and 3. First, the two-dimensional intertemporal equilibrium dynamics of the debt-to-capital ratio and the efficiency-weighted capital intensity are derived from agents’ FOCs and market-clearing conditions under the assumption of a constant-flow budget policy. Here, in contrast to the basic OLG growth model without public debt, we find multiple steady-state solutions exhibiting both saddle-path and asymptotic stability. Under asymptotic stability there is no unique relationship between public debt and capital accumulation. Starting from a high-debt, low-capital-intensity and dynamically efficient steady state with a primary budget surplus, the debt-to-GDP ratio can be reduced only by both raising the tax rate and the public expenditure ratio, and it is accompanied by a fall in private capital intensity.

Globalization, Capital Accumulation, and Terms of Trade

This chapter is devoted to developing elements of an economic theory of globalization. At the beginning different aspects of the globalization of markets and production are considered and the main causes of the globalization process since the early 1970s are enumerated. To entangle the economic consequences of two of these main causes a comparative static analysis is used first. Since the integration of populous developing countries into the world market economy changes their factor-proportions, the simultaneous dynamics of region-specific factor proportions and terms of trade are analyzed in an intertemporal equilibrium of the Heckscher-Ohlin two-country model. In view of rather high savings rates of Asian economies a terms-of-trade improvement for these emerging economies can be foreseen. To check this rather optimistic long-run result Krugman and Venables’ (Quartely Journal of Economics, 110, 857–880, 1995) medium-run core-periphery globalization model is finally analyzed.

Modeling the Growth of the World Economy: The Basic Overlapping Generations Model

This chapter is devoted to a simple modeling of the growth of the world economy. To this end a log-linear, CD version of Diamond’s (American Economic Review, 55, 1126–1150, 1965) neoclassical growth model is used as basic overlapping generations (OLG) growth model. This is then extended across several further dimensions in the following chapters. As a simple but complete intertemporal general equilibrium model it comprises the optimization problems of agents (younger and older households as well as firms) and the market clearing conditions for each model period. The fundamental equation of motion of the efficiency-weighted capital intensity is derived from the first-order conditions for household’s utility and firm’s profit maximization and from labor and capital market clearing conditions. The “golden rule” of capital accumulation ensures that consumption per efficiency capita is maximized over the long run.

External Balance, Dynamic Efficiency and Welfare Effects of National Climate Policies

This chapter investigates domestic and foreign welfare effects of unilateral and multilateral permit policies in a two-country overlapping generations model with producer carbon emissions. We show that the welfare effects of a more stringent cap on emissions depend on the external balance of the policy implementing country, the dynamic (in)efficiency of the world economy and the preference for environmental quality. Under dynamic efficiency the global welfare loss of policy implementation in the net foreign creditor country is lower than of a policy implementation in the net foreign debtor country. Moreover, although the country which has unilaterally implemented a permit policy would gain from a multilateral policy, the associated welfare loss for the other country is larger than that of a unilateral policy abroad.