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Dynamic Capital Interactions, Externalities and Trade

Author

Listed:
  • DATTA, M.

    (Department of Economics, University of Saskatchewan, Saskatoon, Canada)

  • MIRMAN, L.

    (Department of Economics, University of Virginia, Charlottesville, VA)

Abstract

The motivation for this paper is to introduce trade in a dynamic model with capital interactions and to evaluate the consequences of trading on capital accumulation and market clearing prices. We consider a dynamic two-country, two-commodity model in which each country specializes in the production of one commodity and trades with the other country to consume both. The amount of capital used for production in one country generates externalities in the production of the good in the other country. This is one element of interdependence between nations. Another source of interdependence comes from the market clearing prices, since the equilibrium price depends upon supply decisions while consumption decisions are affected by these prices. We have a dynamic duopoly model to capture the strategic dynamic interaction between the countries. We work with a linear-logarithmic example and find a closed loop Cournot-Nash equilibrium. We derive the equilibrium evolution of stocks and prices over time and show that the noncooperative equilibrium is efficient either when there is no production externality or when the marginal rate of substitution between the commodities is same within the country and for the world economy. We also compare our result to the equilibrium that occurs each country, in autarky, produces both goods for its own consumption. We show that both countries are strictly worse off in the latter case.

Suggested Citation

  • Datta, M. & Mirman, L., 1994. "Dynamic Capital Interactions, Externalities and Trade," CORE Discussion Papers 1994009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1994009
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1994.html
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    Citations

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    Cited by:

    1. Datta, Manjira & Mirman, Leonard J, 2000. "Dynamic Externalities and Policy Coordination," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 44-59, February.
    2. Hassan Benchekroun & Ngo Van Long, 2001. "Leader and Follower: A Differential Game Model," CIRANO Working Papers 2001s-08, CIRANO.
    3. Datta, Manjira, 1997. "Externalities and Price Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 587-603, August.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery

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