National and Regional Economic Growth with Fiscal Policies: Congested Public Goods and Endogenous Labor Supply of a Small-Open Economy

Wei-Bin Zhang

.

DOI: 10.4236/me.2010.13020                

Abstract

The purpose of this study is to build a two-regional growth model with capital accumulation, endogenous time distribution between leisure and labor, and regional public goods with fiscal policies. We emphasize dynamic interactions among capital accumulation, externalities, supply of public good with different fiscal policies, congestion of public good, endogenous time, and economic geography. The economy consists of two regions and each region consists of the industrial sector and public sector. First, we develop the two-region growth model with public goods and fiscal policies. Second, we show how to find equilibrium values of the dynamic system. Then, we simulate model with specified parameter values. Finally, we carry out comparative statics analysis with regard to parameter changes in tax rates and congestion. Our comparative statics analysis provides some important insights. For instance, a main difference between the effects of increasing the two regions’ tax rates on the output is that as region 1’s (2’s) tax rate on the industrial sector is increased, the national industrial output, national capital employed by the economy, and the national wealth are increased (reduced).

Keywords

Small-Open Economy, Interregional Economy, Capital Accumulation, Endogenous Leisure and Work Time, Fiscal Policies, Public Goods

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	W. B. Zhang, “Economic Growth Theory. Hampshire: Ashgate,” 2005.
[2]	W. B. Zhang, “International Trade Theory: Capital, Knowledge, Economic Structure, Money and Prices over Time and Space,” Springer, Berlin, 2008.
[3]	W. B. Zhang, “A Multi-Region Model with Capital Ac-cumulation and Endogenous Amenities,” Environment and Planning A, Vol. 39, No. 9, 2007, pp. 2248-2270.
[4]	H. Oniki and H. Uzawa, “Patterns of Trade and Invest-ment in a Dynamic Model of International Trade,” Review of Economic Studies, Vol. 32, 1965, pp. 15-38.
[5]	A. V. Deardorff, “The Gains from Trade in and out of Steady State Growth,” Oxford Economic Papers, Vol. 25, No. 2, 1973, pp. 173-191.
[6]	R. J. Ruffin, “Growth and the Long-Run Theory of Inter-national Capital Movements,” American Economic Review, Vol. 69, No. 5, 1979, pp. 832-842.
[7]	R. Findlay, “Growth and Development in Trade Models,” In: R. W. Jones and R. B. Kenen, Eds., Handbook of In-ternational Economics, Amsterdam, North-Holland, 1984.
[8]	J. Eaton, “A Dynamic Specific-Factors Model of Interna-tional Trade,” Review of Economic Studies, Vol. 54, No. 2, 1987, pp. 325-338.
[9]	R. A. Brecher, Z. Q. Chen and E. U. Choudhri, “Absolute and Comparative Advantage, Reconsidered: the Pattern of International Trade with Optimal Saving,” Review of International Economics, Vol. 10, No. 4, 2002, pp. 645- 656.
[10]	G. Sorger, “On the Multi-Country Version of the So-low-Swan Model,” The Japanese Economic Review, Vol. 54, No. 2, 2002, pp. 146-164.
[11]	T. Eicher and S. Turnovsky, “Scale, Congestion and Growth,” Economica, Vol. 67, No. 267, 2000, pp. 325- 346.
[12]	M. A. Gómez, “Fiscal Policy, Congestion, and Endogen-ous Growth,” Journal of Public Economic Theory, Vol. 10, No. 4, 2008, pp. 595-622.
[13]	A. B. Abel and B. S. Bernanke, “Macroeconomics,” 3rd Edition, Addison-Wesley, New York, 1998.
[14]	E. McGrattan and J. Schmitz, “Maintenance and Repair: Too Big to Ignore,” Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 23, No. 4, 1999, pp. 2-13.
[15]	P. Kalaitzidakis and S. Kalyvitis, “Financing ‘New’ Public Investment and/or Maintenance in Public Capital for Growth? The Canadian Experience,” Economic Inquiry, Vol. 43, 2005, pp. 586-600.
[16]	E. V. Dioikitopoulos and S. Kalyvitis, “Public capital Maintenance and Congestion: Long-Run Growth and Fiscal Policies,” Journal of Economic Dynamics & Con-trol, Vol. 32, No. 12, 2008, pp. 3760-3779.