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The author would like to thank Arnold Harberger, Sebastian Edwards, and Kenneth Sokoloff for their insightfuladvice. This paper has greatly benefited from comments of Ratna Sahay, Jianhai Lin, and Aaron Tornell. I am also grateful to my colleagues at the IMF Finance Department Seminar, including Patrick Njoroge, Roberto Perrilli Shaun Roache, and Marco Rossi, as well as conference participants at the 2008 Chinese Economist Society Annual Conference and seminar participants at the International Economics Seminar at UCLA.
There can be anomalous cases in which a technological improvement in the export sector generates an export growth that is not as high as the GDP growth. For example, in an extreme case in which some natural resources used as input in export production are only available in fixed quantity, then a technological advance in the export sector will take place in terms of using less labor and capital combined with the given amount of natural resources. In such setting, the export sector releases labor and capital to other sectors in the economy and GDP may grow faster than exports.
One can use a scenario of exogenous productivity growth in the export sector to also cover the case of a rise in the world price of a country’s principal export product. In both cases, the same resources that were previously used to pay for a given quantity of imports can, after the exogenous shock, pay for a significantly greater amount.
Obviously, other factors, such as capital outflow could have a stronger influence on the movement of the real exchange rate, leading to real exchange rate depreciation. We would say that in such cases, TFP improvement in the export sector is not the dominant disturbance.
The imports can be paid by things other than exports, such as capital inflow, in the short run. But in the long run, trade account has to be balanced and the country’s imports have to equal its exports.
We make this assumption because in most developing countries, the list of important export is relatively short and the bulk of the production of these exportables is in fact exported.
Balance of trade can also be defined as exports minus imports. These two definitions are actually equivalent.
This is true regardless of: a) the exportable sector ends up producing more than 350 units, in which case it will absorb additional resources from the other sectors of the economy, or b) the exportable sector ends up producing less than 350 units, in which case it will release resources to the other sectors.
Real wage equals nominal wage divided by the weighted average price of tradable goods and home goods.
According to growth accounting, economic growth comes from three sources, increment in capital, increment in labor, and productivity improvement. Although this paper focuses only on the effect of productivity improvement in different sectors on economic growth, the model has a broader application and can also be used to study as well the effect of increment in capital or labor in different sector on economic growth. Any growth initiated in the exportable sector, no matter whether it is stimulated by increment in capital/labor or by a productivity improvement, is the “exports driving growth” scenario, this is what generates the export boom leading economic growth. Similarly, any growth initiated in the nontradable sector, no matter whether it is stimulated by an increment in capital/labor or by a productivity improvement, is the “growth driving exports” scenario, implying that it is people’s increased demand for imports as the economy grows that causes exports to grow as well.
Since the initial equilibrium has EXd =100, IMd=400, and Hd =500, this implies that all three income elasticities of demand are equal to 1.