Home production, labor taxation and trade account

The two-country growth model developed in this paper incorporates home production and distinguishes between a market sector producing services that can also be home-produced and a market sector producing goods without home-produced substitutes. This distinction coincides in the model with the distinction between the sector producing internationally tradable goods and the sector producing nontradables. Hence, differentials in labor tax rates across countries, which determine differences in the allocation of households’ time between market activities and home activities, influence also the mix of tradable and nontradable goods that characterizes the market output of each country, thus affecting their bilateral trade balance.