Capital goods trade, relative prices, and economic development

Piyusha Mutreja, B Ravikumar and Michael Sposi

No 294, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: 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.

JEL-codes: E22 F11 O11 O4 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-12-01
New Economics Papers: this item is included in nep-gro, nep-int and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Capital Goods Trade, Relative Prices and Economic Development (2018)
Working Paper: Capital Goods Trade, Relative Prices, and Economic Development (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:294

DOI: 10.24149/gwp294

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