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.

JEL Classification: E22; F11; O11; O4;

https://doi.org/10.20955/wp.2014.012

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2014-05-16

Number: 2014-12