Virtual trade between separated time zones and growth

• Author: Sugata Marjit,Biswajit Mandal
• DOI: http://doi.org/10.1111/ijet.12123
• Published date: 01 June 2017
• Date: 01 June 2017

doi: 10.1111/ijet.12123

Virtual trade between separated time zones and growth

Sugata Marjit∗and Biswajit Mandal†

The purpose of this paper is to propose a model where trade has a direct and positive impact

on growth rate of two trading nations beyond the level effect. We use the idea of virtual trade

in intermediates induced by non-overlapping time zones and show how trade can increase the

equilibrium optimal rate of growth. In this structure the trade impact goes beyond the level effect

and directly causes growth. Typically standard models of trade cannot generate an automatic

growth impact. Virtual trade may allow production to continueuninterrupted in separated time

zones such as between the USA and India, and that can lead to higher growth for both countries.

Later we extend the model to incorporate the accumulation of skills which becomes necessary

for sustaining steady state growth.

Key wor ds international trade, time zone, growth

JEL classification F10, F43

Accepted 28 April 2016

1 Introduction

In his well-known monograph on growth Lucas (2002) rightly points out that removing barriers to

trade does not necessarily lead to a rise in the growth rate. Standard neoclassical models of trade

cannot generate the direct and automatic growth impact of a more open trade regime. He was

commenting on the pioneering work on trade reform by Krueger (1983) and Harberger (1984). The

observation by Lucas tells us about a key problem in having a growth model where gains from trade

naturally lead to a higher growth rate. This is the reason why there is no generic model of trade

and growth with clear predictions. Typically trade leads to reallocation of resources in the direction

of efficient use. But such reallocation may neither increase the rate of investment nor lead to a

permanent increase in productivity – the two sources through which long-run growth can increase.

Unfortunately the current literature does not refer to the well-known work of David Ricardo as

elaborated in Findlay (1974) which clearly exhibits a direct relation between trade and growth by

increasing the rate of profit. In fact Ricardo’s argument for the import of corn was related to making a

critical input for production, labor, less expensivefor capitalists, the drivers of growth and industrial

development. Trade in final goods thus reduced the cost of an input, raising the rate of profit, and

∗Centre for Studies in Social Sciences, Calcutta, India (CSSSC), and Centre for Trainingand Research in Public Finance

and Policy (at CSSSC), Kolkata,India. Email: marjit@gmail.com

†Department of Economics & Politics, Visva-Bharati University, Santiniketan, India.

This is a revised version of a paper (with a different title) presented in a conferenceat the University of Kobe in November,

2014, on “Fragmentation, Time Zone and their Dynamic Consequences”. Comments from conferencepar ticipants have

been helpful. We also gratefully acknowledge the comments and suggestions made by an anonymous referee and the

editor of this journal. This research was supported by the RBI endowment at CSSSC. The usual disclaimer applies.

International Journal of Economic Theory 13 (2017) 171–183 © IAET 171

International Journal of Economic Theory