Capital goods trade, relative prices, and economic development

Piyusha Mutreja, B. Ravikumar, Michael Sposi

Research output: Contribution to journalArticle

15 Scopus citations

Abstract

International trade in capital goods has quantitatively important effects on economic development through capital formation and TFP. Capital goods trade enables poor countries to access more efficient technologies, leading to lower relative prices of capital goods and higher capital–output ratios. Moreover, poor countries use their comparative advantage and allocate their resources more efficiently, and increase their TFP. We quantify these channels using a multisector, multicountry, Ricardian model of trade with capital accumulation. The model matches several trade and development facts within a unified framework. Frictionless trade in capital goods reduces the income gap between rich and poor countries by 40 percent. More than half of the reduction in the income gap is due to the TFP channel.

Original languageEnglish (US)
Pages (from-to)101-122
Number of pages22
JournalReview of Economic Dynamics
Volume27
DOIs
StatePublished - Jan 2018

Keywords

  • Capital goods trade
  • Income differences
  • Investment rate
  • Relative prices

ASJC Scopus subject areas

  • Economics and Econometrics

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