A small open economic growth model with imported goods, tourism, and terms of trade

Abstract

This paper constructs an economic growth model of a small open economy with tourism and imported goods in a perfectly competitive economy. The study focuses on the effects of changes in terms of trade, with a preference for imported goods, on the dynamic paths of trade balance and economic growth. The basic framework for modelling a national economy is based on the Solow-Uzawa neoclassical growth model with Zhang’s alternative approach to household behaviour. We build a nonlinear dynamic model with interdependence between economic growth, economic structure, tourism, prices, wealth and income. We provide a computational process to follow the motion of the economic system. Simulation is used to carry out a comparative dynamic analysis of the terms of trade, the propensity to consume imported goods, the rate of interest, the price elasticity of tourism, and the total productivity of the service sector. The comparative dynamic analysis provides some insights into the complexity of the tourism economy.