Capital Mobility, the Real Exchange Rate, and the Rate of Return to Capital in the Presence of Non-Traded Goods
23 Pages Posted: 29 Jan 2001
Date Written: December 2000
Abstract
This Paper constructs a general equilibrium trade model of a small open economy producing an exported good, an imported good and a non-traded good by using two or more factors of production, one of which, namely capital, is imperfectly internationally mobile. Within this framework, it is shown that an exogenous capital inflow may lead to a depreciation of the real exchange rate, and to an increase in both the nominal and the real rate of return to capital. For these paradoxical results to occur it is necessary that the non-traded good is capital intensive.
Keywords: Capital mobility, nominal and real rate of return to capital, real exchange rate
JEL Classification: F10, F20
Suggested Citation: Suggested Citation