Dynamic Factor Price Equalization & International Convergence
AbstractWe offer a duality-based methodology for incorporating multi-sector effects of international trade into open economy macroeconomic models, developing the concepts of the dynamic factor price equalization set and the integrated intertemporal equilibrium. Under this approach, the aggregate production function depends on output prices and factor endowment stocks. It preserves all of the structure of a standard GDP function from the trade theory literature. In a two-country version of the model considered below, we examine the properties of the dynamic factor price equalization set. If the global economy is initially outside of this set, the equations of motion will pull the economy back into this set. Inside the dynamic FPE set, factor prices are equalized internationally, and with identical tastes and technology, the economy can be regarded as a fully integrated world equilibrium in a dynamic sense (the integrated intertemporal equilibrium). In this equilibrium, all of the standard properties of a closed economy one-sector neoclassical growth model hold, ruling out cycles and chaos, and allowing us to characterize the evolution of international inequality and the persistence of productivity and endowment shocks. Working from the integrated intertemporal equilibrium, we identify properties of persistence linked to inequality and real economic shocks. Cross-country differences in per capita incomes and wealth, and the factor content of trading patterns, may persist over time and even into the new steady state. This provides yet another reason why we might observe lack of income convergence internationally. In addition, real shocks in one country may be transmitted to the other country through factor markets and product prices, and may have persistent effects into the steady-state as well. The model can also generate an endogenous Balassa-Samuelson effect.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2008-20.
Length: 20 pages
Date of creation: Nov 2008
Date of revision:
Neoclassical Models of Trade; Economic Growth of Open Economies; Cross- Country Output Convergence;
Other versions of this item:
- Francois, Joseph & Shiells, Clinton R., 2008. "Dynamic Factor Price Equalization & International Convergence," CEPR Discussion Papers 7065, C.E.P.R. Discussion Papers.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-21 (All new papers)
- NEP-CBA-2008-12-21 (Central Banking)
- NEP-DEV-2008-12-21 (Development)
- NEP-INT-2008-12-21 (International Trade)
- NEP-OPM-2008-12-21 (Open Economy Macroeconomic)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Claustre Bajona & Timothy J. Kehoe, 2006.
"Demographics in dynamic Heckscher-Ohlin models: overlapping generations versus infinitely lived consumers,"
377, Federal Reserve Bank of Minneapolis.
- Claustre Bajona & Timothy J. Kehoe, 2006. "Demographics in Dynamic Heckscher-Ohlin Models: Overlapping Generations Versus Infinitely Lived Consumers," NBER Working Papers 12566, National Bureau of Economic Research, Inc.
- Claustre Bajona & Timothy Kehoe, 2010.
"Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 487-513, July.
- Claustre Bajona & Timothy J. Kehoe, 2008. "Trade, growth, and convergence in a dynamic Heckscher-Ohlin model," Staff Report 378, Federal Reserve Bank of Minneapolis.
- Claustre Bajona & Timothy Kehoe, 2010. "Code files for "Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model"," Computer Codes 09-241, Review of Economic Dynamics.
- Claustre Bajona & Timothy J. Kehoe, 2006. "Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model," NBER Working Papers 12567, National Bureau of Economic Research, Inc.
- Jaume Ventura & Francesco Caselli, 2000.
"A Representative Consumer Theory of Distribution,"
American Economic Review,
American Economic Association, vol. 90(4), pages 909-926, September.
- Caselli, F. & Ventura, J., 1996. "A Representative Consumer Theory of Distribution," Working papers 96-11, Massachusetts Institute of Technology (MIT), Department of Economics.
- Caselli, G & Ventura, J, 1996. "A Representative Consumer Theory of Distribution," Papers 534, Harvard - Institute for International Development.
- Manning, R. & Markusen, J.R., 1988.
"National Product Functions In Comparative Steady-State Analysis,"
University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers
8808c, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Manning, Richard & Markusen, James R, 1991. "National Product Functions in Comparative Steady-State Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 613-25, August.
- Valerie Cerra & Sweta C. Saxena, 2005.
"Growth Dynamics: The Myth of Economic Recovery,"
- Sweta Chaman Saxena & Valerie Cerra, 2005. "Growth Dynamics: The Myth of Economic Recovery," IMF Working Papers 05/147, International Monetary Fund.
- Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ren� B�heim).
If references are entirely missing, you can add them using this form.