Abstract for:A two-region model of economic growth and trade
Trade protectionist tendencies are visible in a few countries around the world due to their increasing current account deficit and their public and household debt. However, the long-term effect of such a policy is quite unclear especially considering the feedback from the Rest of the World (ROW). Using the US economy as a case, we present our model of economic growth and trade for two regions: the USA and the ROW. The model contains three major reinforcing loops responsible for endogenous economic growth. It also outlines the mechanisms that explain the emergence of debt and its negative impact on economic development. In order to model foreign trade, we introduce a factor FTE (foreign trade effectiveness) to describe the extent to which one economy has market access to another economy. On the whole, there is a fair match between the calibrated model outputs and historical data. Our scenario simulations demonstrate that a higher share of non-investors’ income in the US economy may help to reduce the debt-to-GDP ratio and accelerate the growth in the long run. Import tariffs on foreign products may also have such positive effects if the tariff revenue is distributed to the non-investors.