The World Income Distribution
AbstractWe 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2973.
Date of creation: Sep 2001
Date of revision:
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Other versions of this item:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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