Capital Accumulation and the Welfare Gains from Trade

McMaster University, Department of Economics, Working Paper Series, 2016-03 (rev. 07/2017)

33 Pages Posted: 22 Aug 2016 Last revised: 26 Jul 2017

See all articles by Wyatt Brooks

Wyatt Brooks

University of Notre Dame

Pau Pujolas

McMaster University

Date Written: July 24, 2017

Abstract

We measure the gains from a trade cost reduction in a model with dynamic accumulation of factors. We show that the tight link between import intensity and gains from trade that exists in static models breaks down along transition paths in dynamic models. When trade costs are reduced, the need to accumulate factors temporarily shifts spending from consumption to investment. Import intensity may rise or fall along the transition path, depending on the relative import intensity of consumption and investment. Calibrating the model to the U.S. economy, we find that investment is more import intensive than consumption, so that import intensity is falling along the transition path even as consumption is rising. Therefore, while higher import intensity is associated with higher consumption when comparing steady states (as in static models), it is associated with lower consumption along a given transition path. We also consider the case of endogenous firm creation as another form of investment and factor accumulation, and again find a negative relationship between consumption and import intensity along the transition path.

Keywords: Dynamics, Capital Accumulation, International Trade, Welfare Gains from Trade

JEL Classification: E13, E22, F11, F41

Suggested Citation

Brooks, Wyatt and Pujolas, Pau, Capital Accumulation and the Welfare Gains from Trade (July 24, 2017). McMaster University, Department of Economics, Working Paper Series, 2016-03 (rev. 07/2017). Available at SSRN: https://ssrn.com/abstract=2826680 or http://dx.doi.org/10.2139/ssrn.2826680

Wyatt Brooks

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Pau Pujolas (Contact Author)

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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