Integrated Macroeconomic Production Function for Open Economies: A New Schumpeterian Solow Model for Globalization

Paul Welfens

No 9724, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The macroeconomic production function is a traditional key element of modern macroeconomics, as is the more recent knowledge production function which explains knowledge/patents by certain input factors such as research, foreign direct investment or international technology spillovers. This study is a major contribution to innovation, trade, FDI and growth analysis, namely in the form of a combination of an empirically relevant knowledge production function for open economies – with both trade and inward FDI as well as outward foreign direct investment plus research input – with a macro production function. Plugging the open economy knowledge production function into a standard macroeconomic production function yields important new insights for many fields: The estimation of the production potential in an open economy, growth decomposition analysis in the context of economic globalization and the demand for labor as well as long run international output interdependency of big countries; and this includes a view at the asymmetric case of a simple two country world in which one country is at full employment while the other is facing underutilized capacities. Finally, there are crucial implications for the analysis of broad regional integration schemes such as TTIP or TPP and a more realistic and comprehensive empirical analysis.

Keywords: potential output; innovation; knowledge production function; macroeconomics; globalization (search for similar items in EconPapers)
JEL-codes: E23 F02 F62 O11 O32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2016-02
New Economics Papers: this item is included in nep-ino, nep-int and nep-mac
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