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Transfers, the Terms of Trade and Capital Accumulation

  • Emily T. Cremers
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    The static trade literature has concluded that, absent distortions and bystanders, transfer induced movements in the terms of trade cannot be large enough (under Walrasian stability) to produce the transfer paradox. Dynamic one-sector models have argued that a transfer paradox is possible, but have relied upon international capital mobility and movements in the world interest rate rather than commodity markets and prices. In a dynamic two-sector overlapping generations model - which allows for both static and intertemporal terms of trade effects -commodity trade can produce a steady state transfer paradox under Walrasian stability, and without distortions or bystanders. The existence of the paradox is due to the effect of the transfer on world capital accumulation which is shown to always (that is, for any ranking of factor intensities and savings rates) improve the donor's terms of trade. Transfers may also be Pareto-improving in the steady state, and produce paradoxical welfare results along the transition path.

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    File URL: http://degit.sam.sdu.dk/papers/degit_13/c013_018.pdf
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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c013_018.

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    Length: 28 pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:deg:conpap:c013_018
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    1. Claustre Bajona & Timothy J. Kehoe, 2008. "Trade, growth, and convergence in a dynamic Heckscher-Ohlin model," Staff Report 378, Federal Reserve Bank of Minneapolis.
    2. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September.
    3. Cremers, Emily T. & Sen, Partha, 2008. "The transfer paradox in a one-sector overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1995-2012, June.
    4. Sayan, Serdar, 2005. "Heckscher-Ohlin revisited: implications of differential population dynamics for trade within an overlapping generations framework," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1471-1493, September.
    5. Galor, O. & Polemarchakis, H.M., 1984. "Intertemporal equilibrium and the transfor paradox," CORE Discussion Papers 1984014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Slobodan Djajic, Sajal Lahiri and Pascalis Raimondos-Møller, . "Foreign aid, domestic investment and welfare," Economics Discussion Papers 463, University of Essex, Department of Economics.
    7. Ichiro Gombi & Shinsuke Ikeda, 2003. "Habit Formation And The Transfer Paradox," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 361-380.
    8. Claustre Bajona & Timothy J. Kehoe, 2006. "Demographics in dynamic Heckscher-Ohlin models: overlapping generations versus infinitely lived consumers," Staff Report 377, Federal Reserve Bank of Minneapolis.
    9. Yano, M. & Nugent, J.B. & Lay, R.N., 1995. "Aid, Non-Traded Goods and the Transfer Paradox in Small Countries," Papers 9515, Southern California - Department of Economics.
    10. Murray C. Kemp & Koji Shimomura, 2002. "A Theory of Voluntary Unrequited International Transfers," The Japanese Economic Review, Japanese Economic Association, vol. 53(3), pages 290-300.
    11. Grinols, Earl L, 1987. "Transfers and the Generalized Theory of Distortions and Welfare," Economica, London School of Economics and Political Science, vol. 54(216), pages 477-91, November.
    12. Turunen-Red, Arja H. & Woodland, Alan D., 1988. "On the multilateral transfer problem : Existence of Pareto improving international transfers," Journal of International Economics, Elsevier, vol. 25(3-4), pages 249-269, November.
    13. Yano, Makoto, 1991. "Temporary transfers in a simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 54(2), pages 372-388, August.
    14. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
    15. Yano, Makoto, 1983. "Welfare aspects of the transfer problem," Journal of International Economics, Elsevier, vol. 15(3-4), pages 277-289, November.
    16. Slobodan Djajic & Sajal Lahiri & Pascalis Raimondos-Moller, 1998. "The Transfer Problem and the Intertemporal Terms of Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 427-436, May.
    17. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-86, November.
    18. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1985. "The Generalized Theory of Transfers and Welfare: Exogenous (Policy-imposed) and Endogenous (Transfer-induced) Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 697-714, August.
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