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International Specialization and the Return to Capital

  • Batista, Catia

    ()

    (Universidade Nova de Lisboa)

  • Potin, Jacques

    ()

    (ESSEC Business School)

How does factor accumulation affect the pattern of international specialization and returns to capital? We provide a new integrated treatment to this question using a panel of 44 developing and developed countries over the period 1976-2000. We confirm the Heckscher-Ohlin prediction that, with sufficient differences in country endowments, there is no factor price equalization and countries specialize in different subsets of goods. Innovatively, we obtain the returns to capital implied by this model: these are consistent with the Lucas paradox, which we explain after accounting for cross-country differences in the cost of capital goods. We also find that, along their development path, countries have often experienced structural change in the form of intra-industry specialization. Our findings are consistent with Ventura's hypothesis that growth can be promoted in this way through "beating the curse of diminishing returns" – indeed we find no decrease in the return to capital at any given capital-labor ratio despite capital accumulation by most countries within a cone of diversification.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4683.

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Length: 60 pages
Date of creation: Jan 2010
Date of revision:
Publication status: forthcoming in: B.E. Journal of Macroeconomics (Advances), 2015
Handle: RePEc:iza:izadps:dp4683
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  24. Chang-Tai Hsieh & Peter J. Klenow, 2003. "Relative Prices and Relative Prosperity," NBER Working Papers 9701, National Bureau of Economic Research, Inc.
  25. Juan Carlos Hallak & Peter K. Schott, 2011. "Estimating Cross-Country Differences in Product Quality," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 417-474.
  26. Ulrich R. Kohli, 1978. "A Gross National Product Function and the Derived Demand for Imports and Supply of Exports," Canadian Journal of Economics, Canadian Economics Association, vol. 11(2), pages 167-82, May.
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