International Trade and Composition of Capital Across Countries
45 Pages Posted: 5 Mar 2014
Date Written: October 1, 2013
Composition of capital is systematically related to income levels: rich countries have higher shares of equipment in their physical capital than poor countries. I examine the quantitative significance of productivity and trade for capital composition. Rich countries have more equipment capital because they have an absolute advantage in equipment and enjoy efficiency gains from specialization according to comparative advantage. Absence of equipment trade reduces the share of equipment in rich countries to two thirds. Poor countries have less equipment capital because they are inefficient at producing equipment and face large trade costs to export their comparative advantage good in exchange for imported equipment. Removal of these trade costs reduces differences in the share of equipment to approximately one fourth.
Keywords: Equipment capital, Structures capital, Capital goods trade, Capital composition
JEL Classification: E22, F14, F43, O16, O47
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