A New Modeling Approach for Helping to Understand the Causes and Consequences of Trade Imbalances

Charles Horioka and Nicholas Ford
Additional contact information
Nicholas Ford: Wolfson College, University of Cambridge, U.K.

No DP2025-31, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: President Trump's tariffs have revitalized the debate about the causes and consequences of the US trade deficit. In this paper, we put forward a theoretical model that contributes to this discussion. In autarky, countries with low saving rates will have lower capital stock to GDP ratios and a higher marginal product of capital than countries with high saving rates; consequently, investment opportunities in the low saving rate countries will tend to offer higher returns. When such countries interact and when there are no financial market imperfections or barriers, our model predicts that a low saving rate country will initially have a trade deficit and that the high saving rate country will have a trade surplus as a way of transferring real capital to where its marginal product is higher. These transfers of capital will eventually cause rates of return on capital to converge and trade imbalances to decline and to eventually reverse themselves. However, because trade imbalances are small compared to capital stocks, this process may take many decades, as a result of which trade imbalances may persist for some time.

Keywords: Exchange rate disconnect puzzle; Feldstein-Horioka Puzzle; Financial market imperfections; Marginal product of capital (MPK); Mundell-Fleming model; Net capital transfers; Purchasing Power Parity (PPP) Puzzle; Rate of return on capital; Trade deficits and surpluses; Trade imbalances; World interest rate (r*) (search for similar items in EconPapers)
JEL-codes: E43 F13 F21 F32 F41 F62 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2025-12, Revised 2026-10
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2025-31.pdf First version, 2025 (application/pdf)

Related works:
Working Paper: A New Modeling Approach for Helping to Understand the Causes and Consequences of Trade Imbalances (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:dp2025-31

Access Statistics for this paper

More papers in Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University 2-1 Rokkodai, Nada, Kobe 657-8501 JAPAN. Contact information at EDIRC.
Bibliographic data for series maintained by Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University ().