THE CURSE AND BLESSING OF FIXED SPECIFIC FACTORS IN SMALL-OPEN ECONOMIES

Fidel Perez Sebastian and María Guilló

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper investigates how a country's specific-factors endowment affects its long-run economic performance. We build an open-economy version of the two-sector neoclassical growth model in which we introduce fixed industry-specific inputs in both activities. The model predicts the type of international factor-price equalization found by Trefler (1993). We show that, under factor price equalization, differences in input shares between sectors that only use mobile factors and industries that employ fixed specific inputs can explain why nations that seem to have similar factor endowments can show very different income levels. In particular, larger amounts of factors specific to the industry with a lower (larger) labor share lead the economy to enjoy larger (smaller) long-run income levels. The model can also account for overtaking episodes between countries along their development paths.

Keywords: specific-factors; long-run incomes; small open economies (search for similar items in EconPapers)
JEL-codes: F43 O41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2003-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2003-36.pdf Fisrt version / Primera version, 2003 (application/pdf)

Related works:
Journal Article: The curse and blessing of fixed specific factors in small-open economies (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2003-36

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