| Abstract: | This paper extends the Dornbusch–Fisher–Samuelson (1977) model to explain deindustrialization and trade; this extension follows Baumol's (1967) observation on the negative correlation between the size of the service sector and growth. It is shown that trade improves welfare through the exploitation of comparative advantages but accelerates the shift toward services, slowing down the rate of growth. Trade can decrease welfare if manufacturing activities with learning-by-doing move abroad. In this case, some experience is lost and all countries lose. |
