Capital goods trade and economic development

Piyusha Mutreja, B Ravikumar and Michael Sposi

No 183, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Almost 80 percent of capital goods production in the world is concentrated in 10 countries. Poor countries import most of their capital goods. We argue that international trade in capital goods has quantitatively important effects on economic development through two channels: (i) capital formation and (ii) aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth model. Barriers to trade result in a misallocation of factors both within and across countries. We calibrate the model to bilateral trade flows, prices, and income per worker. Our model matches several trade and development facts within a unified framework. It is consistent with the world distribution of capital goods production, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods and marginal product of capital. The cross-country income differences decline by more than 50 percent when distortions to trade are eliminated, with 80 percent of the change in each country?s income attributable to change in capital. Autarky in capital goods results in an income loss of 17 percent for poor countries, with all of the loss stemming from decreased capital.

Keywords: trade; capital; investment; economic development (search for similar items in EconPapers)
JEL-codes: E22 F11 O11 O4 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-05-01
New Economics Papers: this item is included in nep-gro, nep-int and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Working Paper: Capital goods trade and economic development (2014)
Working Paper: Capital goods trade and economic development (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:183

DOI: 10.24149/gwp183

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