Capital Accumulation and Dynamic Gains from Trade

We compute welfare gains from trade in a dynamic, multi-country Ricardian model where international trade affects capital accumulation. We calibrate the model for 93 countries and examine transition paths between steady-states after a permanent, uniform trade liberalization across countries. Our model allows for both the relative price of investment and the investment rate to depend on the world distribution of trade barriers. Accounting for transitional dynamics, welfare gains are about 60 percent of those measured by comparing only the steady-states, and three times larger than those with no capital accumulation. We extend the model to incorporate adjustment costs to capital accumulation and endogenous trade imbalances. Relative to the model with balanced trade, the gains from trade increase more for small countries because they accumulate capital at faster rates by running trade deficits in the short run.