Poverty Trap and Inferior Goods in a Dynamic Heckscher-Ohlin Model
AbstractWe extend the dynamic Heckscher-Ohlin model in Bond et al. (2009) and show that if the labor intensive good is inferior, then there may exist multiple steady states in autarky and poverty trap can arise. Poverty traps for the world economy, in the form of Pareto dominated steady states, are also shown to exist. We show that the opening of trade can have the e¤ect of pulling the initially poorer country out of a poverty trap, with both countries having steady state capital stocks exceeding the autarky level. However, trade can also pull an initially richer country into a poverty trap, with both countries having lower steady state capital stocks in free trade than they would in autarky. These possibilities are a sharp contrast with dynamic Heckscher-Ohlin models with normality in consumption, where the country with the higher (lower) capital stock than the other will reach the steady state where the level of welfare is higher (lower) than at the autarkic steady state.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 766.
Date of creation: Mar 2011
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dynamic Heckscher-Ohlin model; poverty trap; inferior good;
Other versions of this item:
- Bond, Eric W. & Iwasa, Kazumichi & Nishimura, Kazuo, 2013. "Poverty Traps And Inferior Goods In A Dynamic Heckscher–Ohlin Model," Macroeconomic Dynamics, Cambridge University Press, vol. 17(06), pages 1227-1251, September.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
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- Eric BOND & IWASA Kazumichi & NISHIMURA Kazuo, 2012.
"The Dynamic Heckscher-Ohlin Model: A diagrammatic analysis,"
12008, Research Institute of Economy, Trade and Industry (RIETI).
- Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, 06.
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