International trade and capital accumulation in an overlapping generations model with a public intermediate good

We investigate the effects of a public intermediate good on trade patterns, capital accumulation, and the gains from trade in a two‐country, three‐sector overlapping generations model. A public intermediate good affects not only the productivity of private production but capital accumulation; thus, the results differ from those obtained in previous studies. First, opening to trade may accelerate capital accumulation in the higher‐savings country. Additionally, the country producing a public intermediate good more (which is labor‐intensive) may be the importer of the investment good (which is the most capital‐intensive). Finally, the lower‐savings country may have lower steady‐state welfare under trade.     

International Trade and Volume Patterns under Quasilinear Preferences

We formally analyze the pattern and volume of trade by embedding quasilinear preferences in the standard perfectly competitive, two‐factor, two‐good, two‐country trade model. Quasilinear preferences deliver a natural partition of the two goods into a luxury and a necessity, and preserve the validity of the Heckscher–Ohlin and Heckscher–Ohlin–Vanek theorems. In addition, the predicted factor content of trade under quasilinear preferences is smaller (larger) than the predicted factor content of trade under homothetic preferences if and only if the luxury good is capital (labor) intensive. This result offers a novel explanation for the “missing‐trade” mystery.     

HISTORY‐DEPENDENT PATHS AND TRADE GAINS IN A SMALL OPEN ECONOMY WITH A PUBLIC INTERMEDIATE GOOD*

This study reexamines McMillan's (International Economic Review 19 (1978), 665–78) analysis of a dynamic small open economy with a public intermediate good. Concerning the trade patterns of the open economy, we find results that were overlooked in McMillan's analysis. Among others, if labor endowment is of intermediate size, there are two saddle‐point steady states, and the initial stock of the public good determines the long‐run trade pattern. We also add a gains‐from‐trade analysis to McMillan's model and demonstrate that if the economy has a comparative advantage in a good with productivity less sensitive to the public intermediate good, the economy may lose from trade at the steady state.     

Shared Renewable Resources: Gains from Trade and Trade Policy

This paper examines the effects of international trade and trade policy in a two‐country, two‐good model with an open‐access renewable resource that is internationally shared. We show that both countries may still benefit from trade when they specialize in the production of their comparative advantage good, although the shared resource is reduced by trade. In addition, we demonstrate that the steady state utility of a resource‐good importing country may be reduced by trade, even if it specializes in the production of a non‐resource good. Import tariffs and export taxes on a resource good may increase or decrease the shared stock level depending on the production patterns in a trading steady state. The trade policy is likely to be Pareto‐improving when the shared stock rises, while both countries may be made worse off by the trade policy when the shared stock falls.     

The Distributional and Allocative Impacts of Virtual Labor Mobility across Time Zones through Communication Networks

Using a specific‐factors' model, with two goods (a shift‐working good and a non‐shift‐working good), three factors (capital specific to shift‐working, land specific to non‐shift‐working and labor) and two countries (Home and Foreign), which are located in different time zones, we highlight the impact of trade in labor services via communication networks on factor prices and production patterns. If two countries are identical in size, then under free trade in labor services, all workers work only in their local daytime, and night shift in each country is performed by imported labor services supplied by residents of the other country in their local daytime. Night‐time wage becomes the same as daytime wage (a wage equalization result). Other factor prices are also equalized. In both countries, capital rental rate increases, while land rent decreases. However, if two countries are different in size, trade in labor services does not equalize wages: in the large country, wages for night‐shift workers are higher than daytime wages and some residents work at night; in the small country, daytime wages become higher than night‐time wages and no one works at night, and night‐shift work is done by imported labor services from the large country. Land rent in the small country decreases. Land rent in the large country may or may not decrease, but it is always higher than in the small country. Capital rental rates in both countries are equalized and increase.     

Shared renewable resources and gains from trade under technology standards

Using a two‐country, two‐good model of international trade, we examine gains from trade and strategic interaction in resource management among countries that share renewable resources such as fishery stocks. Two goods are a resource good, which is the harvest of the shared stock, and some other good that may be thought of as manufactures. The productivity of the resource good depends on harvesting technology and the stock level. This paper focuses on technology standards (e.g., restrictions on fishing gears, vessels, areas, and time) over other methods for resource management because they are most commonly implemented in fisheries. Technology standards are modeled as a restriction on the harvesting technology; that is, under strict technology standards, firms exploit resources as if they are using inferior harvesting technology. We show that an opening up of trade may reduce the shared stock and cause steady‐state utility to decrease in a resource‐good importing country and increase in a resource‐good exporting country. Strikingly, when the shared stock is in jeopardy (a high demand for the harvest), steady‐state harvest is maximized after an opening up of trade by what we call multilateral resource management in this paper and both countries gain from trade.     

Status-Seeking, Catching-Up, and Comparative Statics in a Dynamic Heckscher–Ohlin Model

This paper examines a two‐country dynamic general equilibrium model with status‐seeking agents. We show that the introduction of status‐seeking behavior brings about new properties in equilibrium dynamics. While there exists a continuum of steady states in the standard dynamic models, the present framework demonstrates that, under some conditions, there uniquely exists an incompletely specialized steady state, which is locally saddle‐point stable. Therefore, catching‐up and overtaking phenomena seen in economic development can be explained, and comparative statics analysis also is made possible. Our comparative statics analysis illustrates, for example, that trade pattern is determined in the Heckscher–Ohlin manner; the patient country acts just like a capital abundant one to export the capital‐intensive good. Furthermore, as distinct from the existing literature, the present study shows that the existence of an incompletely specialized steady state can be ensured even if the two countries conduct different policies.     

Trade with Time Zone Differences: Factor Market Implications

The main purpose of this study is to illustrate, with a simple two‐factor (skilled and unskilled labor) model, how a time‐saving improvement in business‐services trade benefitting from differences in time zones can have an impact on national factor markets. In doing so, we intend to capture the situation where the night‐shift work in one country is replaced by the day‐shift work in another country. In other words, we will show that trade with time zone differences will result in shifts of the relative supplies and demands for skilled labor around the globe.     

Dynamic Patterns of Trade Imbalances with Recursive Preference

Based on the recursive preference approach, the dynamic and global properties of the two‐country open economy are examined with one good and inputs of labor and capital, with capital being freely traded internationally. First, by showing that the world's consumption increases (decreases) with an increase (decrease) in the world's capital, the global stability of the economy is obtained. Secondly, the nonmonotonicity of consumption between impatient country 1 and patient country 2 is established. Thirdly, with the Cobb–Douglas‐type production function and country 1's technological superiority, the dynamic trade patterns and the asset–debt position are derived.     

Public infrastructure and trade in a dynamic two‐country model

We develop a two‐country dynamic trade model with public infrastructure having an “unpaid‐factor”‐type positive externality on private sectors’ productivity. With welfare‐maximizing national governments making infrastructure investment, we show that a country with a smaller labor endowment, a lower depreciation rate of infrastructure, and/or a lower time preference rate will become an exporter of a good that is more dependent on infrastructure and will gain from trade, whereas its trading partner may lose from trade. We consider both the nonstrategic governments case and the case of strategic governments that recognize the effect on the terms of trade.     

International Trade with a Public Intermediate Good and the Gains from Trade*

This paper presents a one‐primary factor, two‐consumer good, and two‐country model of international trade where each country’s government supplies a country‐specific public intermediate good so as to attain efficient production. By introducing the Marshallian adjustment process, it is demonstrated that the country with larger factor endowment exports the good whose productivity is more sensitive to the public intermediate good. Our normative analysis of free trade shows the following results. First, at least one country gains from trade. Secondly, if a country incompletely specializes in the trading equilibrium, the country necessarily loses from trade.     

Intra‐industry Trade Liberalization and the Environment

This paper examines how trade liberalization affects national and global pollution in a multi‐country model incorporating monopolistic competition and intra‐industry trade as well as inter‐industry trade. Each country produces skill‐intensive differentiated goods and labor‐intensive goods. Pollution is a by‐product of production but pollution abatement can be undertaken. Regardless of country characteristics, if the differentiated‐good sector is sufficiently cleaner (dirtier) then, without any change in environmental taxes, a multilateral reduction in import protection accorded to the differentiated good or to both goods typically leads to a decline (rise) in pollution in all countries. Pollution havens tend not to arise.     

Technology and the dynamics of comparative advantage

This paper explores how trade affects innovation in a two‐country, two‐good, two‐factor Heckscher–Ohlin model with heterogeneous firms. Trade openness induces an increase in process innovation in both industries. The increase is stronger in the comparative advantage industry. Trade openness boosts prospective entrants' profits in that industry, which leads to further increases in product innovation. Trade liberalization generates a different relative impact on innovation across industries, depending on trade costs. When they are high (low), it increases process innovation relatively more in the comparative advantage (disadvantage) industry, leading to TFP divergence (convergence) across industries.     

Convergence in a Dynamic Heckscher–Ohlin Model with Land

Convergence among nations that share the same preferences and technologies is a key result of the closed‐economy neoclassical growth framework that has received substantial support in the data. However, Heckscher–Ohlin versions of the two‐sector neoclassical growth model predict that nations that differ in their capital–labor ratios may not converge to the same steady state, even if they are identical in all other aspects. This is a puzzling result that warns us about potential dangers of international trade. In this paper we show that when land, an input in fixed supply, is introduced into the model, international trade in goods no longer limits the capacity of poor nations to catch up with the advanced world.     

Footloose Capital and Comparative Advantage

We investigate the effect of country size differentials and Ricardian technology differences on firms’ location decisions using a two‐country, two‐good (homogeneous agricultural good and differentiated manufacturing products), two‐factor (labour and footloose capital) simple new economic geography model. We found that manufacturing firms may agglomerate in a country where the manufacturing sector has a comparative disadvantage. In addition, when country size differentials and Ricardian technology differences exist between two countries, the key factor influencing firms’ location decisions changes according to the level of trade liberalization, from being market size‐dependent to becoming technology‐dependent.     

Anti‐immigration policy in the destination country and skilled–unskilled wage inequality in a source economy with or without unemployment

This paper is aimed at theoretically examining the consequence of the anti‐immigration policy adopted in the destination country on the skilled–unskilled wage inequality in a source nation using a couple of two‐sector, specific‐factor general equilibrium models in both the presence and absence of unemployment. Emigration requires incurring some capital cost for professional skill formation on the part of every prospective emigrant that adds to the opportunity cost of emigration. The authority of the destination country determines the number of visas to be granted and hence directly controls the magnitude of skilled emigration from the source country. In the migration equilibrium, the expected skilled wage income abroad is equal to the opportunity cost of emigration. In both the presence and absence of unemployment of unskilled labor, the outcome of the policy on the wage inequality crucially hinges on both the magnitude of the fixed cost of emigration and the technological factors. In the specific‐factor Harris–Todaro model, the degree of imperfection in the unskilled labor market is an additional factor. Finally, some policy recommendations have been made for protecting the interest of the poor unskilled workforce.     

Factor Endowments,Democracy, and Trade Policy Divergence

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector‐specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor, and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land)–abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource–abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.     

A Factor Endowment Theory of Endogenous Growth and International Trade

This paper presents a dynamic general equilibrium model of multi‐country, two‐good and two‐factor, in which both long‐run growth and international trade patterns are examined. In each country, government expenditure on a public intermediate good plays a crucial role in the realization of persistent growth. It is shown that the long‐run pattern of international trade is determined in a Heckscher‐Ohlin manner.     

Two‐level CES Production Technology in the Solow and Diamond Growth Models*

The two‐level CES aggregate production function—that nests a CES into another CES function—has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two‐factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital–skill complementarity.     

Factor price overshooting with trade liberalization: theory and evidence

This paper develops an intra‐industry trade model with skilled and unskilled labor as factors of production, endogenous accumulation of skilled labor and firm heterogeneity in factor intensities to examine the effect of trade reforms on factor prices. Since exporters are more skill intensive than non–exporters, a decrease in trade barriers initially increases wage inequality between skilled and unskilled workers, as a result of an increase in the relative demand for skilled labor. Over time, however, as agents respond to the change in relative wages by investing in skilled labor, the relative wage of skilled labor decreases. Evidence from Chilean plant–level data supports the idea of factor price overshooting with trade liberalization.