GOVERNMENTS’ DEBTS AND PUBLIC GOODS IN A MULTICOUNTRY GROWTH MODEL WITH TRADABLE AND NON-TRADABLE GOODS

Abstract

This study deals with dynamic relationships between global growth, trade, economic
structural change, and government’s debts. Government debts are seldom theoretically modelled
in the literature of global economic growth theory. We introduce governments’ debts and
endogenous public good supplies into a general dynamic equilibrium growth model with
multiple countries and free trades between countries. The model is developed by integrating the
Solow-Uzawa growth model, the Oniki–Uzawa trade model, and Diamond’s growth model with
government’s debt within a comprehensive framework. The model synthesizes these well-known
economic models with Zhang’s utility function to determine household behavior. It is built for
any number of national economies. Each national economy consists of one tradable, one nontradable
and one public sector. The model describes a dynamic interdependence between wealth
accumulation, and division of labor, governments’ debts, national debts, and wealth and capital
distribution under perfect competition. We demonstrate that the dynamics of the J -country
world economy can be described by 2J differential equations. We simulate the model,
demonstrating the existence of an equilibrium point, and showing instability of the equilibrium
point. We also demonstrate how changes in some parameters affect short-run global economic
development and the equilibrium point. Our comparative dynamic analyses provided some
important insights into interactions between global economic growth, resource distributions,
economic structures, and governments’ debts.