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Openness To Trade as a Determinant of the Elasticity of Substitution between Capital and Labor

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Author Info
Marianne Saam
Abstract

Some recent work on economic growth considers the aggregate elasticity of substitution between capital and labor as a measure of economic flexibility. It is thought to depend on technological and institutional determinants. I study how a openness to trade affects the aggregate elasticity of substitution of a large country in a Heckscher-Ohlin model with trade in intermediates and equalization of factor prices. With constant capital stocks, trade enlarges the set of available intermediates in the same way as a rise in the elasticity of substitution in their production would. An optimal tariff corresponds to an additional rise in the elasticity of substitution. In two growing economies, trade only rises the elasticity of substitution of the GDP function of the faster growing country.

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File URL: http://www.ifw-kiel.de/VRCent/DEGIT/paper/degit_10/C010_013.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c010_013.

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Length: 23 pages
Date of creation: Jun 2005
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Handle: RePEc:deg:conpap:c010_013

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Related research
Keywords: aggregate elasticity of substitution normalization Heckscher-Ohlin model capital accumulation

Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production

This paper has been announced in the following NEP Reports:

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  1. Yuhn, Ky-hyang, 1991. "Economic Growth, Technical Change Biases, and the Elasticity of Substitution: A Test of the De La Grandville Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 340-46, May. [Downloadable!] (restricted)
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers c009_030, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
    Other versions:
  4. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 41-56, March. [Downloadable!] (restricted)
  5. Rainer Klump & Olivier de La Grandville, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March. [Downloadable!] (restricted)
  6. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 57-84, February.
  7. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June. [Downloadable!] (restricted)
  8. James E. Rauch & Vitor Trindade, 2003. "Information, International Substitutability, and Globalization," American Economic Review, American Economic Association, vol. 93(3), pages 775-791, June. [Downloadable!] (restricted)
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