International Trade and Investment under Different Rates of Time Preference
AbstractThis paper attempts to integrate the theory of trade with that of capital movements, and to study the two country world where each nation has a different rate of time preference. It resolves the indeterminacy problem intrinsic in the Heckscher-Ohlin model where trade and factor movements coexist by assuming that capital movements are infinitesimally more costly than trade in goods. Under certain assumptions, one can dichotomize the behavior of asset accumulation from the dynamic pattern of trade specialization. Complete specialization will take place most likely in the country with a higher rate of time preference, which specializes into the more labor-intensive sector. It is shown that a single-commodity model does exaggerate the amount of capital movements, but that the qualitative nature of asset accumulation patterns obtained in a single-commodity model of capital movements holds intact in the model that incorporates trade. This paper offers another explanation to the Feldstein-Horioka paradox that domestic investment responds more closely to increasing savings than capital outflows do. If an economy is imperfectly specialized, increased savings will be absorbed in capital deepening rather than in capital outflow.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a229.
Length: 33,  p.
Date of creation: Dec 1990
Date of revision:
Other versions of this item:
- Fukao Kyoji & Hamada Koichi, 1994. "International Trade and Investment under Different Rates of Time Preference," Journal of the Japanese and International Economies, Elsevier, vol. 8(1), pages 22-52, March.
- Fukao, K. & Hamada, K., 1990. "International Trade And Investment Under Different Rates Of Time Preference," Papers 605, Yale - Economic Growth Center.
- Kyoji Fukao & Koichi Hamada, 1990. "International Trade and Investment under Different Rates of Time Preference," NBER Working Papers 3457, National Bureau of Economic Research, Inc.
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