The Three-GAP Theory of Investment and Growth

In this paper a simple open economy macro economic model is developed to identify which of the gaps-saving-investment, trade, or fiscal-become the binding constraints in the adjustment process with growth in developing countries. Using results of comparative statistics, the stability conditions are derived to examine whether short-run effects are consistent with dynamic stability of the economy. A comparative statics analysis of a constrained economy with respect to all the binding gaps is examined and their policy implications are discussed in detail.