Austrian Model of Trade and Growth of a Developing Economy

This paper develops a model of trade and growth for a developing economy based on the Austrian theory of capital. Two types of economies differ in terms of time preference rates. Each economy produces two capital goods, both of which provide services to consumers through their life periods. A human capital intensive capital good is produced by a relatively more roundabout method than less human capital intensive one. An economy with a low time preference rate exports a human capital intensive capital good to a high time preference rate economy. By importing a human capital intensive capital good and investing for a low vintage level of domestic human capital to the high vintage of the imported capital good, the growth rate of the high time preference rate economy increases. Another aspect of the Austrian trade model is to interpret the export of the consumer goods of a developing economy as the export of the domestic savings to finance the import of the capital good from the advanced economy. Trade contributes to the growth of the developing economy. Thus, the Austrian trade model exhibits the financial side of trade in the early stage of development.