Capital Goods Trade, Relative Prices, and Economic Development

40 Pages Posted: 11 Jan 2017

See all articles by Piyusha Mutreja

Piyusha Mutreja

Syracuse University - Department of Economics

B. Ravikumar

Federal Reserve Bank of Saint Louis

Michael Sposi

Southern Methodist University (SMU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-12-01

Abstract

International trade in capital goods has quantitatively important effects on economic development through two channels: capital formation and aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth framework. Our model matches several trade and development facts within a unified framework: the world distribution of capital goods production and trade, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods. Reducing barriers to trade capital goods allows poor countries to access more efficient means of capital goods production abroad, leading to relatively higher capital output ratios. Meanwhile, poor countries can specialize more in their comparative advantage—non-capital goods production—and increase their TFP. The income gap between rich and poor countries declines by 40 percent by eliminating barriers to trade capital goods.

JEL Classification: E22, F11, O11, O4

Suggested Citation

Mutreja, Piyusha and Ravikumar, B. and Sposi, Michael, Capital Goods Trade, Relative Prices, and Economic Development (2016-12-01). Globalization and Monetary Policy Institute Working Paper No. 294. Available at SSRN: https://ssrn.com/abstract=2897410 or http://dx.doi.org/10.24149/gwp294

Piyusha Mutreja (Contact Author)

Syracuse University - Department of Economics ( email )

110 Eggers Hall
Department of Economics
Syracuse, NY 13244
United States

HOME PAGE: http://www.maxwell.syr.edu/econ/

B. Ravikumar

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Michael Sposi

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

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