Government Spending and Pattern of Trade in the Presence of Economies of Scale

Government Spending and Pattern of Trade in the Presence of Economies of Scale

In the context of a two-country model, this paper shows that the country that spends more on public goods imports the output of the industry which is subject to economies of scale. This result is consistent with the fact that a number of LDCs export the output of primary industries (which are subject to constant cost) and import the output of manufacturing industries (which are subject to economies of scale). In addition, size of the government in the LDCs is large as compared to the Developed Countries. It is also shown that there is a negative relationship between size of the government and real wage rate.