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Capital accumulation and the welfare gains from trade

Author

Listed:
  • Wyatt J. Brooks

    () (University of Notre Dame)

  • Pau S. Pujolas

    () (McMaster University)

Abstract

Abstract We measure the gains from a trade cost reduction in a model with dynamic accumulation of factors. We show that the tight link between import intensity and gains from trade that exists in static models breaks down along transition paths in dynamic models. When trade costs are reduced, the need to accumulate factors temporarily shifts spending from consumption to investment. Import intensity may rise or fall along the transition path, depending on the relative import intensity of consumption and investment. Calibrating the model to the US economy, we find that investment is more import intensive than consumption, so that import intensity is falling along the transition path even as consumption is rising. Therefore, while higher import intensity is associated with higher consumption when comparing steady states (as in static models), it is associated with lower consumption along a given transition path. We also consider the case of endogenous firm creation as another form of investment and factor accumulation, and again find a negative relationship between consumption and import intensity along the transition path.

Suggested Citation

  • Wyatt J. Brooks & Pau S. Pujolas, 2018. "Capital accumulation and the welfare gains from trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 491-523, August.
  • Handle: RePEc:spr:joecth:v:66:y:2018:i:2:d:10.1007_s00199-017-1070-z
    DOI: 10.1007/s00199-017-1070-z
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    References listed on IDEAS

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    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Joseph Steinberg, 2018. "The Macroeconomic Impact of NAFTA Termination," 2018 Meeting Papers 753, Society for Economic Dynamics.
    2. Michael Sposi & Ana Maria Santacreu & B Ravikumar, 2016. "Capital Accumulation and Welfare Gains from Trade," 2016 Meeting Papers 1637, Society for Economic Dynamics.
    3. repec:eee:inecon:v:117:y:2019:i:c:p:175-195 is not listed on IDEAS
    4. repec:eee:inecon:v:119:y:2019:i:c:p:93-110 is not listed on IDEAS
    5. Jose Rodriguez Mora & David Comerford, 2015. "The Gains from Economic Integration," 2015 Meeting Papers 569, Society for Economic Dynamics.
    6. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    7. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael, 2019. "Capital accumulation and dynamic gains from trade," Journal of International Economics, Elsevier, vol. 119(C), pages 93-110.
    8. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.

    More about this item

    Keywords

    Dynamics; Capital accumulation; International trade; Welfare gains from trade;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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