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Capital Goods Trade, Relative Prices, and Economic Development

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  • Mutreja, Piyusha

    () (Syracuse University)

  • Ravikumar, B.

    () (Federal Reserve Bank of St. Louis)

  • Sposi, Michael J.

    () (Federal Reserve Bank of Dallas)

Abstract

International trade in capital goods has quantitatively important effects on economic development through capital formation and TFP. Capital goods trade enables poor countries to access more efficient technologies, leading to lower relative prices of capital goods and higher capital-output ratios. Moreover, poor countries can use their comparative advantage and allocate their resources more efficiently, and increase their TFP. We quantify these channels using a multisector, multicountry, Ricardian model of trade with capital accumulation. The model matches several trade and development facts within a unified framework. Frictionless trade in capital goods reduces the income gap between rich and poor countries by 40 percent. More than half of the reduction in the income gap is due to the TFP channel.

Suggested Citation

  • Mutreja, Piyusha & Ravikumar, B. & Sposi, Michael J., 2017. "Capital Goods Trade, Relative Prices, and Economic Development," Working Papers 2017-6, Federal Reserve Bank of St. Louis, revised 10 Oct 2017.
  • Handle: RePEc:fip:fedlwp:2017-006
    DOI: 10.20955/wp.2017.006
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    1. repec:eee:inecon:v:108:y:2017:i:c:p:67-81 is not listed on IDEAS
    2. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael J., 2017. "Capital Accumulation and Dynamic Gains from Trade," Working Papers 2017-5, Federal Reserve Bank of St. Louis.
    3. Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
    4. Alok Johri & Md Mahbubur Rahman, 2017. "The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform," Department of Economics Working Papers 2017-12, McMaster University, revised 03 Oct 2017.
    5. Michele Cavallo & Anthony Landry, 2018. "Capital-Goods Imports and US Growth," Staff Working Papers 18-1, Bank of Canada.

    More about this item

    Keywords

    Income differences; Capital goods trade; Relative prices; Investment rate;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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