Capital Goods Trade, Relative Prices, and Economic Development

50 Pages Posted: 16 Mar 2017 Last revised: 6 Mar 2019

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: 2017-03-11

Abstract

International trade in capital goods has quantitatively important effects on economic development through capital formation and TFP. Capital goods trade enables poor countries to access more efficient technologies, leading to lower relative prices of capital goods and higher capital-output ratios. Moreover, poor countries can use their comparative advantage and allocate their resources more efficiently, and increase their TFP. We quantify these channels using a multisector, multicountry, Ricardian model of trade with capital accumulation. The model matches several trade and development facts within a unified framework. Frictionless trade in capital goods reduces the income gap between rich and poor countries by 40 percent. More than half of the reduction in the income gap is due to the TFP channel.

Keywords: Income differences, Capital goods trade, Relative prices, Investment rate

JEL Classification: E22, F11, O11, O4

Suggested Citation

Mutreja, Piyusha and Ravikumar, B. and Sposi, Michael, Capital Goods Trade, Relative Prices, and Economic Development (2017-03-11). FRB St. Louis Working Paper No. 2017-6. Available at SSRN: https://ssrn.com/abstract=2934151 or http://dx.doi.org/10.20955/wp.2017.006

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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