Working Paper

Capital goods trade and economic development

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; total factor productivity;

JEL Classification: E22; F11; O11; O4;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2016-02-01

Number: 2014-12

Pages: 47 pages