Capital accumulation and the welfare gains from trade

Wyatt Brooks () and Pau Pujolas

Economic Theory, 2018, vol. 66, issue 2, No 8, 523 pages

Abstract: Abstract We measure the gains from a trade cost reduction in a model with dynamic accumulation of factors. We show that the tight link between import intensity and gains from trade that exists in static models breaks down along transition paths in dynamic models. When trade costs are reduced, the need to accumulate factors temporarily shifts spending from consumption to investment. Import intensity may rise or fall along the transition path, depending on the relative import intensity of consumption and investment. Calibrating the model to the US economy, we find that investment is more import intensive than consumption, so that import intensity is falling along the transition path even as consumption is rising. Therefore, while higher import intensity is associated with higher consumption when comparing steady states (as in static models), it is associated with lower consumption along a given transition path. We also consider the case of endogenous firm creation as another form of investment and factor accumulation, and again find a negative relationship between consumption and import intensity along the transition path.

Keywords: Dynamics; Capital accumulation; International trade; Welfare gains from trade (search for similar items in EconPapers)
JEL-codes: E13 E22 F11 F41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (14)

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Working Paper: Captial Accumulation and the Welfare Gains from Trade (2017)
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DOI: 10.1007/s00199-017-1070-z

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