Imports as an Indispensable Factor of Production

Abstract

The long-run growth rate of open economies does not depend on international-trade variables as long as perfect domestic substitutes can be produced for imports; but if such perfect substitutes cannot be made, the growth rate does depend on international circumstances. This is the central conclusion of the preceding chapter. The first section of the present chapter gives a number of reasons why imports usually are indeed indispensable in this sense. Section 3.2 argues that it has to be preferred to treat aggregate imports as a factor of production instead of a finished consumption good, because the bulk of world trade is in intermediate goods, most socalled final goods still require further processing and the essence of the role of trade in modern economies is described more adequately this way than by traditional trade theories. Because the effects of disaggregation on the growth rate may be expected to be minor, as became evident in the preceding chapter, we use aggregate models, with all imports as a factor of production; section 3.3 considers the production function and a number of properties we shall use. Section 3.4 discusses the optimizing behaviour, section 3.5 defines an autarkic economy that ‘corresponds’ with the open one where imports are indispensable inputs.