Federal Reserve Bank of Dallas
Globalization and Monetary Policy Institute Working Paper
Capital goods trade, relative prices, and economic development
International trade in capital goods has quantitatively important effects on economic development through two channels: capital formation and aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth framework. Our model matches several trade and development facts within a unified framework: the world distribution of capital goods production and trade, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods. Reducing barriers to trade capital goods allows poor countries to access more efficient means of capital goods production abroad, leading to relatively higher capital output ratios. Meanwhile, poor countries can specialize more in their comparative advantage—non-capital goods production—and increase their TFP. The income gap between rich and poor countries declines by 40 percent by eliminating barriers to trade capital goods.
Cite this item
Piyusha Mutreja & B. Ravikumar & Michael J. Sposi, Capital goods trade, relative prices, and economic development, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper 294, 01 Dec 2016.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
This item with handle RePEc:fip:feddgw:294
is also listed on EconPapers
For corrections, contact Amy Chapman ()