GOVERNMENT SPENDING ON PUBLIC GOODS, SPECIALIZATION-BASED EXTERNAL ECONOMIES AND PATTERN OF TRADE

This paper examines the link between government spending on a public good and pattern of trade in the presence of specialization-based external economies. The results presented in this paper are based on a simple model of an economy that produces one industrial, one agricultural, one public good and a large number of varieties of professional services. It is shown that, when the agricultural and the public goods are non-traded, the country where government spending is relatively large is a net-exporter of varieties of professional services; if varieties of professional services are equally (or more) capital intensive as compared to the industrial good. When the public good and varieties of professional services are non-traded, the country where government spending is relatively large may export the industrial good in exchange for the agricultural good; if the combined capital intensity of professional services and the industrial good is greater than the capital intensity of the agricultural good and the size of specialization-based external economies is sufficiently small.