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Trade and investment in the global economy: A multi-country dynamic analysis

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  • Anderson, James E.
  • Larch, Mario
  • Yotov, Yoto V.

Abstract

We develop a multi-country trade model with domestic investment in physical capital and foreign direct investment (FDI) in the form of non-rival technology capital. Gravity sub-systems for FDI and trade nest with accumulation/decumulation of physical and technology capital in transition to the steady state. The key innovation of our work is the modeling and quantification of the general equilibrium links between trade and investment in the global economy. The importance of FDI is quantified in our calibrated model by comparing aggregate data for 89 countries in 2011 to a counterfactual world without outward and inward FDI from and to low- and lower-middle-income countries. World welfare loss from FDI removal in the poorer countries in the world is around 6%, while world trade falls around 7%, unevenly distributed among winners and losers. Net exports of FDI substitute for export trade across countries.

Suggested Citation

  • Anderson, James E. & Larch, Mario & Yotov, Yoto V., 2019. "Trade and investment in the global economy: A multi-country dynamic analysis," European Economic Review, Elsevier, vol. 120(C).
  • Handle: RePEc:eee:eecrev:v:120:y:2019:i:c:s0014292119301631
    DOI: 10.1016/j.euroecorev.2019.103311
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    More about this item

    Keywords

    Foreign direct investment; Trade; Trade liberalization; Capital accumulation;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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