This Paper constructs a general equilibrium trade model of a small open economy producing an exported good, an imported good and a non-traded good by using two or more factors of production, one of which, namely capital, is imperfectly internationally mobile. Within this framework, it is shown that an exogenous capital inflow may lead to a depreciation of the real exchange rate, and to an increase in both the nominal and the real rate of return to capital. For these paradoxical results to occur it is necessary that the non-traded good is capital intensive.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2644.
Find related papers by JEL classification: F10 - International Economics - - Trade - - - General F20 - International Economics - - International Factor Movements and International Business - - - General