Trade and Inequality in an Overlapping Generations Model with Capital Accumulation

Jun Nie, B Ravikumar and Michael Sposi

No 2024-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study the lifecycle aspect of within-country inequality that stems from capital and labor services supplied by individuals. Our environment is a combination of a multicountry trade model and an overlapping generations model with production and capital accumulation. Trade liberalization increases the measured total factor productivity in each country, which increases the marginal product of capital and incentivizes capital accumulation. Higher capital stock and higher measured productivity raise the marginal product of labor and, hence, wages. Inequality, measured by the ratio of old agents' income to young agents' income, evolves over time due to capital accumulation during the transition from autarky to an open-economy world. Immediately after liberalization, inequality increases. Over time, capital accumulates at a diminishing rate and inequality declines.

Keywords: trade; inequality; lifecycle; capital accumulation (search for similar items in EconPapers)
JEL-codes: D31 E22 F11 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2024-07, Revised 2024-09-23
New Economics Papers: this item is included in nep-dge and nep-gro
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DOI: 10.20955/wp.2024.018

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