Austrian Model of Trade and Growth of a Developing Economy

Abstract

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.