Primary inputs supply, government size and welfare in the presence of monopolistic competition

Abstract

The paper considers the impact of exogenous changes in the supply of primary inputs on government size and welfare in the presence of monopolistic competition. By making use of a simple general equilibrium model, this paper shows that an increase in the supply of labor increases (decreases) the relative size of government if the share of capital in the final good sector is larger (smaller) than the share of capital in the public good sector. An increase in the supply of capital decreases the relative size of government only if the share of capital in the final good sector is equal to (or larger) than the share of capital in the public good sector. An increase in the overall size of the country decreases the relative government size. In addition, an increase in the supply of both capital and labor increases welfare.