ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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A Model of Exports and Investment in an Open Developing Economy

The paper develops a model that privileges exports as the key element of demand; not only do exports permit the exploitation of scale economies by enlarging the size of the market served by domestic producers but also lead to the effective use of the relatively abundant factor, i e, labour. The development literature has further emphasised the fact that exports are instrumental in inducing investment because of the incentive they provide to introduce new techniques through additions to the capital stock. The model introduces somewhat different export and investment equations in an otherwise traditional Keynesian model. Exports lead to investment and investment, in turn, leads to higher capacity utilisation and further investment, which stimulates growth. However, the commodity composition of a developing economy's exports implies that exports are a function of the real exchange rate. An increase in the real exchange rate (depreciation), while stimulating exports and thus growth, however, leads to an erosion of the real wage share because of a price rise through imports. The steady state can be interpreted as a balance of these two forces - an exchange rate depreciation leads to growth through an increase in exports but simultaneously causes a cutback in government expenditure to maintain a floor wage share, impeding the growth process.

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