A Dynamic Specific-Factors Model of International Trade

Jonathan Eaton

The Review of Economic Studies, 1987, vol. 54, issue 2, 325-338

Abstract: In a dynamic economy land and capital serve not only as factors of production but as assets which individuals use to transfer income from working periods to retirement. Changes in the terms of trade and in the endowments of fixed factors do not necessarily have the same effects on factor prices and on the composition of output as they do in a static framework. Changes in these variables affect both total savings and the amount of savings that is diverted toward investment in capital. Results derived from the traditional specific-factors model are more likely to emerge when the sector using land as a factor of production has a higher labor share than the sector using capital. In this case the land-using sector dominates factor markets more than asset markets. Once the roles for land and capital as assets are recognized, the possibility of natural resource booms that reduce steady-state welfare arises. At the same time, an increase in population can raise steady-state welfare.

Date: 1987
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Working Paper: A Dynamic Specific-Factors Model of International Trade (1984)
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