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Capital Accumulation and Dynamic 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 model with capital accumulation. We examine transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. Both the relative price of investment and the investment rate respond to changes in trade frictions. Relative to a static model, the dynamic welfare gains in a model with balanced trade are three times as large. The gains including transition are 60 percent of those computed by comparing only steady states. Trade imbalances have negligible effects on the cross-country distribution of dynamic gains. However, relative to the balanced-trade model, small, less-developed countries accrue the gains faster in a model with trade imbalances by running trade deficits in the short run but have lower consumption in the long-run. In both models most of the dynamic gains are driven by capital accumulation.

Suggested Citation

  • Michael Sposi & Ana Maria Santacreu & B Ravikumar, 2017. "Capital Accumulation and Dynamic Gains from Trade," 2017 Meeting Papers 915, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:915
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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
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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