Permalink : http://hdl.handle.net/2115/47726

KEYWORDS : Two-Sector Growth Model;Small Open Economy;Perpetual Youth Model

In this paper, I examine the long-run specialization patterns that arise in a small open economy using a two-sector growth model in which households faced with finite but uncertain lifetimes undertake intertemporal optimization decisions. I show that in a small open economy with a positive birth rate, imperfect specialization requires that the subjective discount rate be less than the interest rate. This finding contrasts sharply with Stiglitz's (1970) finding that a country must be completely specialized if the subjective discount rate differs from the interest rate. In addition, I show that a steady state equilibrium with incomplete specialization can be saddle-point stable.