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The Marginal Product of Capital, Capital Flows and Convergence

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  • Sirsha Chatterjee
  • Kanda Naknoi

Abstract

The neoclassical theory of economic growth suggests that capital inflows raise the speed of convergence because foreign financial capital is transformed into physical capital. We propose a new methodology to quantify the size of capital inflows which are transformed into physical capital. We use the predicted scale to calculate the output gains from capital flows. Our methodology takes into account cross-country differences and fluctuations in the price of investment goods relative to output. The theory predicts that inefficiency in producing investment goods reduces the gains from capital inflows. A sizable fraction of capital inflows is found to be transformed into physical capital in only a few countries. However, the gains are found to be extremely small.

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Bibliographic Info

Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1202.

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Length: 30 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:pur:prukra:1202

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Keywords: marginal product of capital; capital flows; convergence;

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  1. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  2. Francesco Caselli, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 535-568, 05.
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  9. Laura Alfaro & Sebnem Kalemli-Ozcan, 2004. "Why doesn't capital flow from rich to poor countries? An empirical investigation," 2004 Meeting Papers 53, Society for Economic Dynamics.
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Cited by:
  1. Olivier Jeanne & Pierre-Olivier Gourinchas, 2005. "Capital Flows to Developing Countries: the Allocation Puzzle," 2005 Meeting Papers 240, Society for Economic Dynamics.

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