International Development and Nonlinear Taxation in a Multi-Country Neoclassical Growth Model

Abstract

This paper builds a multi-country growth model with nonlinear taxation and public goods. The dynamic machines of global development are national wealth accumulation and free trade. Different from most of theoretical growth models in neoclassical economics which deals with a two-country world and each economy has a homogeneous population, our model deals with any number of national economies and each economy has heterogeneous populations. A national economy consists of one industrial sector and one public sector and has any number of types of people. Our model integrates economic mechanisms of some well-known economic theories in a comprehensive framework. Each national economy is described according to Walrasian general economic theory. Capital accumulation follows the Solow model. Modelling public goods with nonlinear taxation is based on the literature of progressive taxation and economic growth. The trade pattern is modelled within the Oniki-Uzawa global growth model with two countries. We model household behavior on the basis of Zhang’s concept of disposable income and utility function. We simulate the model to show transitory processes and long-term equilibrium. We carry out comparative dynamic analysis in some parameters.

Keywords

• heterogeneous households
• international trade
• neoclassical growth theory
• nonlinear taxation
• propensity to save