5 Trade and Growth

State three main sources of growth. Which of the three is arguably the most lasting source? There are several mechanisms by which trade may affect productivity change. [You may use numeric examples, graphs, or clear verbal arguments for any of your answers.]

5.1. Suppose there are external economies of scale, driven by free entry into industrial clusters. Explain how comparative advantage changes over time as entrants join a cluster.

5.2. Suppose there is learning by doing in a model with multiple goods and productivity differences across countries. Explain how the pattern of comparative advantage changes over time as each trading partner learns by doing.

5.3. State the principal-agent problem when there is uncertainty over both a project's return and an agent's effort. In which ways can foreign trade affect competition, product-market shares and a project's return? How can foreign trade therefore alter incentives for efficiency and innovation?

5.4. What is the impact of adjustment costs and temporarily idle production factors after trade reform on growth?