International Transmission of Government Spending Monopolistic Competition and North-South Trade

This paper utilises a North-South general equilibrium model where South exports an intermediate good to North in exchange for differentiated goods. The model is used to examine international transmission of government spending and its welfare implications. It is shown that an increase in government spending in North (South) can increase (decrease) the number of differentiated goods produced, thereby decreasing (increasing) the degree of monopoly power in North. Furthermore an increase in government spending in South can decrease the welfare of North, but the impact of an increase in government spending in North on the welfare of South cannot be unambiguously determined.