Capital Accumulation and Dynamic Gains from Trade

59 Pages Posted: 1 Mar 2017 Last revised: 26 Mar 2019

See all articles by B. Ravikumar

B. Ravikumar

Federal Reserve Bank of Saint Louis

Ana Maria Santacreu

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Michael Sposi

Southern Methodist University (SMU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-02-27

Abstract

We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation. We examine transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. Both the relative price of investment and the investment rate respond to changes in trade frictions. Relative to a static model, the dynamic welfare gains in a model with balanced trade are three times as large. The gains including transition are 60 percent of those computed by comparing only steady states. Trade imbalances have negligible effects on the cross-country distribution of dynamic gains. However, relative to the balanced-trade model, small, less-developed countries accrue the gains faster in a model with trade imbalances by running trade deficits in the short run but have lower consumption in the long-run. In both models, most of the dynamic gains are driven by capital accumulation.

Keywords: Welfare gains from trade, Dynamic gains, Capital accumulation, Trade imbalances

JEL Classification: E22, F11, O11

Suggested Citation

Ravikumar, B. and Santacreu, Ana Maria Maria and Sposi, Michael, Capital Accumulation and Dynamic Gains from Trade (2017-02-27). FRB St. Louis Working Paper No. 2017-5. Available at SSRN: https://ssrn.com/abstract=2925735 or http://dx.doi.org/10.20955/wp.2017.005

B. Ravikumar (Contact Author)

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Ana Maria Maria Santacreu

Federal Reserve Banks - Federal Reserve Bank of St. 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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