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Capital Accumulation and Welfare Gains from Trade

Author

Listed:
  • Michael Sposi

    (Federal Reserve Bank of Dallas)

  • Ana Maria Santacreu

    (St. Louis Fed)

  • B Ravikumar

    (Federal Reserve Bank of St Louis)

Abstract

We compute welfare gains from trade in a dynamic multicountry Ricardian model where international trade affects the factors of production in each period. Our environment is a version of Eaton and Kortum (2002) embedded into a two-sector neoclassical growth model. International trade affects investment and, hence capital stock in each period. We calibrate the model and conduct two counterfactual experiments: (i) an unanticipated move to a world with frictionless trade and (ii) an unanticipated move to a world with the calibrated level of U.S. trade barriers. Our computation of the welfare gains uses levels of endogenous variables along the transition path and does not rely on just percentage changes (the hat algebra). In both experiments, (a) about 60 percent of the gains from the baseline steady state to the new steady state is achieved along the transition path and (b) countries that have lower GDP or higher barriers in the baseline experience the largest gains from trade liberalization.

Suggested Citation

  • Michael Sposi & Ana Maria Santacreu & B Ravikumar, 2016. "Capital Accumulation and Welfare Gains from Trade," 2016 Meeting Papers 1637, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1637
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    References listed on IDEAS

    as
    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. Finicelli, Andrea & Pagano, Patrizio & Sbracia, Massimo, 2013. "Ricardian selection," Journal of International Economics, Elsevier, vol. 89(1), pages 96-109.
    3. Michael Sposi & B Ravikumar & Piyusha Mutreja, 2014. "Capital goods trade and economic development," 2014 Meeting Papers 1374, Society for Economic Dynamics.
    4. Wyatt J. Brooks & Pau S. Pujolas, 2018. "Capital accumulation and the welfare gains from trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 491-523, August.
    5. Alessandria, George & Choi, Horag & Ruhl, Kim J., 2021. "Trade adjustment dynamics and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 131(C).
    6. Ricardo Reyes-Heroles, 2017. "The Role of Trade Costs in the Surge of Trade Imbalances," 2017 Meeting Papers 212, Society for Economic Dynamics.
    7. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2018. "Global Imbalances and Structural Change in the United States," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 761-796.
    8. Lorenzo Caliendo & Maximiliano Dvorkin & Fernando Parro, 2015. "The Impact of Trade on Labor Market Dynamics," NBER Working Papers 21149, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Robert Zymek, 2018. "Bilateral Trade Imbalances," 2018 Meeting Papers 1117, Society for Economic Dynamics.
    2. Joseph B. Steinberg, 2020. "The macroeconomic impact of NAFTA termination," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 821-865, May.
    3. Sergi Basco & Martí Mestieri, 2019. "The world income distribution: the effects of international unbundling of production," Journal of Economic Growth, Springer, vol. 24(2), pages 189-221, June.
    4. Yang, Han, 2020. "Dynamic Trade, Education and Intergenerational Inequality," MPRA Paper 99976, University Library of Munich, Germany.
    5. Michael Sposi, 2017. "Demographics and the Evolution of Global Imbalances," Globalization Institute Working Papers 332, Federal Reserve Bank of Dallas.
    6. Lixin Tang, 2020. "Entrepreneur Income Inequality, Aggregate Saving and the Gains from Trade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 273-295, October.
    7. Alessandria, George & Choi, Horag & Ruhl, Kim J., 2021. "Trade adjustment dynamics and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 131(C).
    8. Jonas C. Crews & Fernando Leibovici, 2018. "Trade Adjusts Gradually After Trade Liberalization," Economic Synopses, Federal Reserve Bank of St. Louis, issue 1, pages 1-2.
    9. David Kohn & Fernando Leibovici & Michal Szkup, 2019. "Financial Development and Trade Liberalization," 2019 Meeting Papers 1212, Society for Economic Dynamics.
    10. Michael Sposi & Kei-Mu Yi & Jing Zhang, 2021. "Trade Integration, Global Value Chains, and Capital Accumulation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(3), pages 505-539, September.
    11. Li Shen & Peter Koveos & Xiaodong Zhu & Fei Wen & Jiaxian Liao, 2020. "Outward FDI and Entrepreneurship: The Case of China," Sustainability, MDPI, Open Access Journal, vol. 12(13), pages 1-15, June.
    12. Wyatt J. Brooks & Pau S. Pujolas, 2018. "Capital accumulation and the welfare gains from trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 491-523, August.
    13. Ricardo Reyes-Heroles & Sharon Traiberman & Eva Van Leemput, 2020. "Emerging Markets and the New Geography of Trade: The Effects of Rising Trade Barriers," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 456-508, September.
    14. Yang, Han, 2019. "Dynamic Trade, Education and Intergenerational Inequality," MPRA Paper 96054, University Library of Munich, Germany.
    15. Wen-Tai Hsu & Raymond G. Riezman & Ping Wang, 2019. "Innovation, Growth, and Dynamic Gains from Trade," NBER Working Papers 26470, National Bureau of Economic Research, Inc.
    16. Horag Choi & George Alessandria, 2015. "The Dynamics of the Trade Balance and the Real Exchange Rate: The J Curve and Trade Costs?," 2015 Meeting Papers 1413, Society for Economic Dynamics.
    17. Ricardo Reyes-Heroles, 2018. "Globalization and Structural Change in the United States: A Quantitative Assessment," 2018 Meeting Papers 1027, Society for Economic Dynamics.
    18. Alvarez, Fernando, 2017. "Capital accumulation and international trade," Journal of Monetary Economics, Elsevier, vol. 91(C), pages 1-18.
    19. Adam Hal Spencer, 2020. "Policy effects of international taxation on firm dynamics and capital structure," Discussion Papers 2020-25, University of Nottingham, GEP.
    20. Fernando Leibovici & Ana Maria Santacreu, 2020. "International Trade of Essential Goods During a Pandemic," Working Papers 2020-010, Federal Reserve Bank of St. Louis, revised May 2020.

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    More about this item

    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
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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