Buy National or Buy International? The optimal design of government spending in an open economy
Should governments only purchase domestic goods to increase welfare? And would government spending be higher were it only used for domestic goods? Such proposals, which we call Buy National, were discussed in many countries in the context of the fscal stimuli used to fight the recent global
recession. We augment a simple trade model by government spending and find, that the optimal size of government spending of Buy National is higher than the optimal level of government spending that does also include foreign-produced goods (Buy International). However, even though the optimal level of government spending is higher, real GDP and hence welfare are both lower
in the Buy National regime.