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Capital goods trade and economic development

Author

Listed:
  • Michael Sposi

    (Federal Reserve Bank of Dallas)

  • B Ravikumar

    (Federal Reserve Bank of St Louis)

  • Piyusha Mutreja

    (Syracuse University)

Abstract

Almost 80 percent of capital goods production in the world is concentrated in 9 countries. Poor countries import most of their capital goods. We argue that international trade in capital goods has quantitatively important effects on economic development through two channels: (i) capital formation and (ii) aggregate TFP. We embed a multi-country, multi-sector Ricardian model of trade into a neoclassical growth framework. Barriers to trade result in a misallocation of factors both within and across countries. We calibrate the model to bilateral trade flows, prices, and income per worker. Our model matches the world distribution of capital goods production and accounts for almost all of the log variance in capital per worker across countries. Trade barriers in our model imply that poor countries produce too much capital goods, while rich countries produce too little, relative to the optimal allocation. The cross-country income differences fall by over 50 percent when distortions to capital goods trade are removed. Autarky in capital goods results in a 6 percent reduction in world GDP, with all of the loss stemming from decreased capital accumulation.

Suggested Citation

  • Michael Sposi & B Ravikumar & Piyusha Mutreja, 2014. "Capital goods trade and economic development," 2014 Meeting Papers 1374, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:1374
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    References listed on IDEAS

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    1. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
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    4. Sposi, Michael, 2015. "Trade barriers and the relative price of tradables," Journal of International Economics, Elsevier, vol. 96(2), pages 398-411.
    5. 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.
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    Cited by:

    1. Anderson, James & Larch, Mario & Yotov, Yoto, 2015. "Growth and Trade with Frictions: A Structural Estimation Framework," School of Economics Working Paper Series 2015-2, LeBow College of Business, Drexel University.
    2. Gulzar Ali & Zhaohua Li, 2017. "An Empirical Investigation on the Role of exports, imports and its Determinants in Foreign Trade of Pakistan," Information Management and Business Review, AMH International, vol. 8(6), pages 39-58.
    3. Alexander Monge-Naranjo & Juan M. Sánchez & Raül Santaeulàlia-Llopis, 2019. "Natural Resources and Global Misallocation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(2), pages 79-126, April.
    4. Aydan Dogan, 2019. "Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 202-220, October.
    5. Boileau, Martin & Normandin, Michel, 2017. "The price of imported capital and consumption fluctuations in emerging economies," Journal of International Economics, Elsevier, vol. 108(C), pages 67-81.
    6. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    7. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael, 2019. "Capital accumulation and dynamic gains from trade," Journal of International Economics, Elsevier, vol. 119(C), pages 93-110.
    8. 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.
    9. Gabriel Felbermayr & Erdal Yalcin, 2016. "Engagement der deutschen Wirtschaft in afrikanischen Staaten," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 71.
    10. Joel M. David & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
    11. Mutreja, Piyusha, 2016. "Composition of Capital and Gains from Trade in Equipment," MPRA Paper 74908, University Library of Munich, Germany.
    12. Michael Sposi & Ana Maria Santacreu & B Ravikumar, 2016. "Capital Accumulation and Welfare Gains from Trade," 2016 Meeting Papers 1637, Society for Economic Dynamics.
    13. Waugh, Michael E. & Ravikumar, B., 2016. "Measuring openness to trade," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 29-41.
    14. Mike Waugh & B Ravikumar, 2016. "Trade Potential: A New Measure of Openness," 2016 Meeting Papers 1329, Society for Economic Dynamics.
    15. Michael J. Sposi, 2015. "Navigating the Structure of the Global Economy," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 10-17.
    16. Muendler, Marc-Andreas, 2017. "Trade, technology, and prosperity: An account of evidence from a labor-market perspective," WTO Staff Working Papers ERSD-2017-15, World Trade Organization (WTO), Economic Research and Statistics Division.
    17. Gulzar Ali & Zhaohua Li, 2016. "Analyzing the role of Imports in Economic Growth of Pakistan; Evidence from ARDL Bound Testing Approach," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(9), pages 19-37, September.
    18. Hirokazu Ishise, 2015. "Development Accounting and International Trade," ISER Discussion Paper 0944, Institute of Social and Economic Research, Osaka University.

    More about this item

    JEL classification:

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

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