Growth of Small Open-Economies with Capital Accumulation

This chapter studies a few models of small open economies with international capital mobility. As mentioned before, the main deviation of this book from traditional approaches in modeling dynamics of international trade is how to model households’ decision making. Section 6.1 introduces the one-sector growth (OSG) model of an isolated economy. In the rest of this book, we use the OSG framework to stand for the one sector growth model developed in this section and its various extensions. Section 6.2 examines the Ramsey growth model (which is the most popular approach in economic growth theory with optimal foundation) also for a closed economy. As the OSG approach is an alternative approach to the Ramsey approach, we will also compare the two approaches. Section 6.3 describes dynamics of a small country economy. An open economy can import goods and services and borrow resources from the rest of the world or exports goods and services and lend resources abroad. For convenience of illustration, assume that there is a single good in the world economy and the price of the goods is unity. Section 6.4 extends the model in Sect. 6.3 to a multi-regional economy. The model examines economic growth of a multi-regional small open economy in a perfectly competitive economy. The national economy consists of multiple regions and each region has one production sector and one housing sector. Households move freely among regions, equalizing utility level among regions by choosing housing, goods and saving. A region’s amenity is endogenous, depending on the region’s output and population. We explicitly solve the dynamics of the multiregional economy. As a concluding remark, Sect. 6.5 discusses the theoretical basis for the utility function used in Chap. 6. Section A.6.1 introduces a typical model of a small overlapping-generalizations (OLG) economy, proposed by Galor. Section A.6.2 studies a small country model proposed by Ikeda and Gombi to study the equilibrium dynamics of savings, investment and the current account. Section A.6.3 proves Lemma 6.4.1. Section A.6.4 studies the Keynesian consumption function and examines its possible relations to the consumption function obtained from the OSG approach. Section A.6.5 introduces the Solow growth model and examines its possible relations to the OSG growth model.