The Effect Of Trade On Growth

THE EFFECT OF TRADE ON GROWTH

Total trade (exports + imports) increases growth. Empirical research has proved this conclusively. But there is no theoretical model that shows this. This is because trade does not increase growth directly - but indirectly. And this indirect relationship between trade and growth is shown by two sets of models: growth models and trade models.

1. Growth models like Romer model and Lucas model show that technology and knowledge increase growth. And an important source of technology and knowledge is trade.

2. Trade models like Ricardo model and Heckscher-Ohlin model show that trade increases specialisation and efficiency. And specialisation and efficiency increase growth.

Thus these two sets of models indirectly show that trade increases growth . . .