Economic Growth and International Trade in a Simple Dynamic Leontief Model

Abstract

Traditional Keynesian trade multipliers ignore intermediate goods. Professors Harrod and Johnson have considered them in a limited sense; both used a one-sector model. The objects of this paper are: to consider the effect of intermediate goods on the trade multiplier by use of a matrix trade multiplier; to consider their effect on the rate of growth of both exports and outputs of commodities; and to discuss the stability conditions of a balanced growth rate in a simple dynamic Leontief model.Harrod took intermediate goods into account only as a deduction from exports or investments when he considered the multiplier process. Johnson considered them more explicitly. In his model, an economy uses a primary factor of production, say labour, and foreign-made intermediate goods to produce consumption goods. However, the economy does not use home-produced intermediate goods, and all home-produced goods are consumption goods (so that the economy exports only consumption goods). In a more realistic model, the autonomous increment of demand for investments or exports would create two kinds of multiplier processes: one through the increment of demand for home-produced consumption goods, the other through the demand for home-produced intermediate goods. Each industry uses a primary factor of production and both home-made and foreign-made intermediate goods. Consumers demand both domestic and foreign consumption goods.