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Capital goods trade and economic development

Piyusha Mutreja (), B Ravikumar and Michael Sposi ()

No 2014-12, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We argue that international trade in capital goods has quantitatively important effects on economic development through two channels: (i) capital formation and (ii) aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth model. Barriers to trade result in a misallocation of factors both within and across countries. Our model matches several trade and development facts within a unified framework. It is consistent with the world distribution of capital goods production, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods. The cross-country income differences decline by more than 50 percent when trade frictions are eliminated, with 80 percent of the change in each country's income attributable to change in capital.

Keywords: Income differences; Capital goods trade; Investment rate; TFP. (search for similar items in EconPapers)
JEL-codes: E22 F11 O11 O4 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2014-05-16
New Economics Papers: this item is included in nep-gro, nep-int and nep-mac
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