The World Income Distribution

43 Pages Posted: 11 Oct 2001  

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2001

Abstract

We show that even in the absence of diminishing returns in production and technological spillovers, international trade leads to a stable world income distribution. This is because specialization and trade introduce de facto diminishing returns - countries that accumulate capital faster than average experience declining export prices, depressing the rate of return to capital and discouraging further accumulation. Because of diminishing returns to capital accumulation at the country level, the cross-sectional behaviour of the world economy is similar to that of existing exogenous growth models. Cross-country variation in economic policies, savings and technology translate into cross-country variation in incomes, and country dynamics exhibit conditional convergence as in the Solow-Ramsey model. The dispersion of the world income distribution is determined by the forces that shape the strength of the terms of trade effects - the degree of openness to international trade and the extent of specialization. Finally, we provide evidence that countries accumulating faster experience a worsening in their terms of trade. Our estimates imply that, all else equal, a 1% faster growth is associated with approximately a 0.7% decline in the terms of trade.

Keywords: Cross-country income differences, endogenous growth, international trade, specialization, terms of trade effects

JEL Classification: F12, F43, O40, O41

Suggested Citation

Acemoglu, Daron and Ventura, Jaume, The World Income Distribution (September 2001). CEPR Discussion Paper No. 2973. Available at SSRN: https://ssrn.com/abstract=286496

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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