Trade and Permanent Growth with Domestic and Foreign Capital Goods, and International Capital Movements

Domestic and foreign capital and consumption goods are imperfect substitutes in production and demand functions of the growth model by Bardhan–Lewis. We extend the model by introducing exogenous technical progress and allow for foreign debt dynamics without dropping domestic capital goods. Trade and growth are mutually affecting each other. Trade may speed up or decrease growth in theory with and without technical progress in comparison with the Solow–Swan model. Steady-state growth rates include that of world income, and the income and price elasticities of export demand. The dynamic process of the economy is analyzed in terms of exports and foreign debt, and both as a share of a stock of imported capital goods. There are multiple steady states where imported capital goods are paid for by high exports and debt, low debt and low exports, or even negative debt and low exports. A stable VAR with data for Brazil shows that the high-debt steady state is relevant for this country. Steady states with high and low debt are saddle-point stable and the steady-state medium debt is stable. Neoclassical standard results appear as two special cases. We link the model to several strands of literature.