Virtual trade between separated time zones and growth

Abstract

The purpose of this paper is to propose a model where trade has a direct and positive impact on growth rate of two trading nations beyond the level effect. We use the idea of virtual trade in intermediates induced by non-overlapping time zones and show how trade can increase the equilibrium optimal rate of growth. In this structure the trade impact goes beyond the level effect and directly causes growth. Typically standard models of trade cannot generate an automatic growth impact. Virtual trade may allow production to continue uninterrupted in separated time zones such as between the USA and India, and that can lead to higher growth for both countries. Later we extend the model to incorporate the accumulation of skills which becomes necessary for sustaining steady state growth.