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Transfers, the Terms of Trade and Capital Accumulation


  • Emily T. Cremers


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.

Suggested Citation

  • Emily T. Cremers, 2008. "Transfers, the Terms of Trade and Capital Accumulation," DEGIT Conference Papers c013_018, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c013_018

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    References listed on IDEAS

    1. 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.
    2. Claustre Bajona & Timothy Kehoe, 2010. "Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 487-513, July.
    3. 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 606-618, September.
    4. 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.
    5. O. Galor & H. M. Polemarchakis, 1987. "Intertemporal Equilibrium and the Transfer Paradox," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 147-156.
    6. 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 477-491, November.
    7. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-1386, November.
    8. 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.
    9. Yano, Makoto, 1991. "Temporary transfers in a simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 54(2), pages 372-388, August.
    10. Brecher, Richard A. & Bhagwati, Jagdish N., 1982. "Immiserizing transfers from abroad," Journal of International Economics, Elsevier, vol. 13(3-4), pages 353-364, November.
    11. Murray C. Kemp & Koji Shimomura, 2003. "A Theory of Involuntary Unrequited International Transfers," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 686-715, June.
    12. Ichiro Gombi & Shinsuke Ikeda, 2003. "Habit Formation And The Transfer Paradox," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 361-380.
    13. 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.
    14. Yano, Makoto, 1983. "Welfare aspects of the transfer problem," Journal of International Economics, Elsevier, vol. 15(3-4), pages 277-289, November.
    15. Jagdish N. Bhagwati & Richard A. Brecher & Tatsuo Hatta, 1985. "The Generalized Theory of Transfers and Welfare: Exogenous (policy-Imposed) and Endogenous (Transfer-Induced) Distortion," The Quarterly Journal of Economics, Oxford University Press, vol. 100(3), pages 697-714.
    16. Jeffrey B. Nugent & Makoto Yano, 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries," American Economic Review, American Economic Association, vol. 89(3), pages 431-449, June.
    17. 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.
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    More about this item


    transfer paradox; Pareto-improving transfers; two-sector overlapping generations model;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models


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