CESifo Working Paper No. 2631
Optimal Education Policies and Comparative
Advantage
Abstract
We consider the optimal education policies of a small economy whose government has a
limited budget. Initially, the economy is closed and the government chooses its education
policy to maximize welfare under autarky. Then the economy trades with the rest of the
world. Lastly, the government chooses a new education policy that maximizes welfare under
trade. Is it ever optimal for the government to choose its new policy so that it reverses the
economy’s comparative advantage? We find that if the budget stays fixed when it is optimal
to ‘move up the skills chain’ it is not feasible. In such a case a foreign loan is welfare
improving. A move in the opposite direction can be optimal and when it is optimal it is also
feasible.
JEL Code: F11, O15.
Keywords: patterns of trade, education policy, welfare.
Spiros Bougheas
School of Economics
Room B41, Sir Clive Granger Building
University of Nottingham
University Park
UK - Nottingham NG7 2RD
Richard Kneller
School of Economics
Room B70, The Sir Clive Granger Building
University of Nottingham
University Park
UK - Nottingham NG7 2RD
[email protected]
Raymond Riezman
University of Iowa
Department of Economics
USA - Iowa City, IA 52242
[email protected]
January 2009
We would like to thank Emily Blanchard, Eric Bond, Hartmut Egger, James Tybout, Ping
Wang and participants at the “Frontiers in International Trade” Conference, GEP, University
of Nottingham, 2006, the European Trade Study Group Conference, Vienna, 2006 and the
Society for the Advancement of Economic Theory Conference, Kos, 2007, for many helpful
comments. The usual disclaimer applies.