CeBER Working Paper No. 2017-1

Increasing returns to scale are important for economic growth, generating higher levels of productivity. This view was earlier suggested by Verdoorn (1949) and Kaldor (1966) in formulating the basic Laws of economic growth. The later demand-orientated approach based on the export-led growth, gave higher importance to the non-price competitiveness reflected in the income elasticities of trade, as the main determinants of the long-term economic growth, along with external demand. This view was expressed in Thirlwall’s Law (1979) on the balance- of-payments equilibrium growth inspired from the early Harrodian concept of the foreign trade multiplier. This paper aims at considering both concepts, that is, increasing returns to scale (through the Verdoorn’s Law) and non-price competition (through the Thirlwall’s Law) in order to access whether growth adjustments over time are due mostly to productivity changes or due to changes in competitiveness. To do so, we employ a regression analysis which comprises a set of 23 OECD countries over the period 1980-2016. The estimation approach sheds light on whether growth adjustments between the balance-of-payments growth rate and that of actual or potential income are driven by improvements in productivity or improvements in non-price competiveness, or in both.