Academic journal article Seoul Journal of Economics

Austrian Model of Trade and Growth of a Developing Economy

Academic journal article Seoul Journal of Economics

Austrian Model of Trade and Growth of a Developing Economy

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

Ever since Uzawa (1964) extended the growth model of Solow (1956) to an open economy, some issues remain unresolved for the model of trade and growth in the economics literature. The growth experiences of post-War world economy did not perceive every developing open economy to become a member of an advanced economy. International interactions between advanced and developing countries occur in several channels. The first channel involves bringing direct and indirect knowledge spillover effects from the advanced to the developing countries. Such channel, which carries over this spillover effect, could be the international trade of goods, international direct investments, or direct knowledge exchanges.

In the conventional neo-classical growth model of Solow type, the per capita capital stock of different economies converges with each other without reference to the interrelations between the two. Findlay (1996) pertains to this phenomenon as "trains on parallel tracks." International trade plays a role in connecting these two tracks.

Austrian approach emphasizes "individualistic approach" and "market adjustment process" in the market disequilibrium instead of equilibrium itself (Hong 2015). An advantage of the Austrian trade model is to provide the time framework in which the issue of market adjustment process is discussed. It covers the interactions or involvements of traders involved in the trade of the advanced and the developing economies. In this paper there are two markets in different time frameworks. One is the short-term rental markets and the other is the long-term financial markets, which require the investment decisions of the producers of capital goods. Savings take the form of bequests left to the succeeding generation in dynastic utility function. Being trade of the capital goods connected to the financial markets of trading economies, Austrian view sheds the light on the effect of trade on the growth of a developing economy.

Although one does not often find a trade and growth model in the Austrian perspective, an exception is the model of Findlay and Kierzkowski (1983). This model relates human capital formation to the time preference rate of an economy. International trade occurs between economies where human capital is abundant and low. A low time preference rate economy exports a human capital intensive good but imports a less human capital intensive good. Such trade pattern emerging out of the present model is consistent with Findlay and Kierzkowski.

On the part of the production of capital goods I take the Bo?hmBawerkian concept of the roundabout period of production (Hicks 1973; Faber 1979).1 The "irreversibility of time" (Faber and Proops 1989) related to the construction of a capital good is considered as well. In particular, I use Hayek's (1931) triangle of the time structure of production in which inputs at each point of time are differentiated by their distances from the primary input, that is, labor. In this regard, inputs are asymmetric.2

Another distinguishing aspect of Hayek's triangle is linking the reduction of present consumption with lengthening the time structure of inputs along the time axis of the inputs from the primary input. In this case, trade-off occurs between present and future consumption through the accumulation of capital. A reduction of consumption extends the initial period of the original inputs to a greater length of the period. This relationship is claimed to contribute to the growth of an economy.

One produces consumer goods in a relatively short period using simple labor as input, whereas the production of sophisticated services of capital goods requires a greater length of time that needs more human capital as input. This paper extends Hayek's triangle to an open economy from the viewpoint of a developing economy.

A trade pattern of a developing economy particularly displays the exports of consumer goods in exchange for the capital goods from advanced economies. …

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