Convergence and Overtaking in a Dynamic Two Country Model

28 Pages Posted: 26 Sep 2016

See all articles by Partha Sen

Partha Sen

University of Delhi - School of Economics; National Bureau of Economic Research (NBER)

Koji Shimomura

Kobe University - Research Institute for Economic and Business Administration

Date Written: August 08, 2016

Abstract

In two-sector infinite-horizon trade models with factor-price-equalization, convergence of aggregate capital-labor ratios and incomes does not occur because the Euler equations imply equal growth rate of consumption in all economies. In a two-country dynamic specific factors model, we show that factor-price-equalization occurs only in the long run. Per capita incomes and consumptions do not necessarily converge. These depend on the endowments of the primary factors. Depending on these endowments, an initially poorer economy may end up as the richer economy in the steady state, overtaking the initially richer one.

Keywords: convergence, specific factors, Euler equations

JEL Classification: F110

Suggested Citation

Sen, Partha and Shimomura, Koji, Convergence and Overtaking in a Dynamic Two Country Model (August 08, 2016). CESifo Working Paper Series No. 6027, Available at SSRN: https://ssrn.com/abstract=2843442 or http://dx.doi.org/10.2139/ssrn.2843442

Partha Sen (Contact Author)

University of Delhi - School of Economics ( email )

110007 Delhi
India
+91 11 725 7159 (Phone)
+91 11 725 7159 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koji Shimomura

Kobe University - Research Institute for Economic and Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501
Japan
+81 78 881 1212 (Phone)
+81 78 861 6434 (Fax)

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