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This article presents a growth model including geographical space and transportation costs in which the geographical area where firms sell their product is endogenous. Growth is generated by the expansion of trade and there is a positive relationship between degree of openness and income level. The model explains why economies become increasingly more open and why the degree of openness is not robustly correlated with growth. In contrast to other growth models, investment in transport infrastructure plays an important role and the size of the country does not affect growth.

Here we investigate the existence of credit in a cash-in-advance economy where there are complete markets but for the fact that agents cannot commit to repay their debts. Defectors are banned from the credit market but they can use money balances for saving purposes. Without uncertainty, deflation crowds out credit completely. The equilibrium allocation, however, is efficient if the government deflates at the time preference rate. Efficiency can also be restored with positive inflation. For any non negative inflation rate below the optimal level, the volume of credit and the real interest rate increase with inflation. Our results hold when idiosyncratic uncertainty is introduced and households are sufficiently impatient but in one instance: efficiency cannot be restored if the deflation rate is nearby the rate of time preference. Our numerical examples suggest that the optimal inflation rate is not too large for reasonable levels of patience and risk aversion. Finally, we present a framework where the use of money arises endogenously and show that it is tantamount to our cash-in-advance framework. Our results hold in this modified environment.

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This paper develops a two-country model of endogenous growth and international trade. In autarky just one of the countries is capable of generating growth. The trade situation may be characterized by complete or incomplete specialization. In either case, international trade transmits sustained growth to the stagnated economy simply because the terms of trade become each time more favorable to this country. The existence of a non-reproducible factor in the country that grows in autarky is crucial to ensure growth transmission. Moreover, under incomplete specialization the world economy behaves as an integrated economy, and countries converge in per capita income.