Quality of Imports Relative to Exports,and the Transmission of Sustained Growth through the Terms of Trade

Abstract

This paper shows that an economy can import sustained growth, in spite of not possessing mechanisms to absorb foreign knowledge. To do that, it develops a two-country model of exogenous growth with investment-specific technological change. In autarky, one country sustainably grows while the other economy remains stagnant. In the trade situation, the quality-adjusted terms of trade become increasingly favourable to the second economy, which results in the transmission of growth. The continuous improvement in the quality of imported capital goods relative to exported consumption goods is the reason why this occurs. Moreover, this mechanism leads to convergence in per capita income if trade involves incomplete specialisation.     

The external debt contribution to output,employment, productivity and consumption: A model and an application to Chile

A foreign-capital-dependent investment equation is used to generate capital stock series, towards estimating a non-homogeneous variable elasticity of substitution production function. Debt contributions are derived from here. For Chile between 1960 and 1982, a negative correlation between foreign capital and domestic savings, and a low marginal product of capital, account for minimal debt contributions. However, factor price distortions, capacity under-utilization, preferences for current consumption, short planning horizons combined with huge debt, unrealistically rigid assumptions of previous work and model limitations, all suggest substantial direct consumption costs of default or repudiation, and through them, indirect output and income costs.     

Optimal climate and fiscal policy in an OLG economy

This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations (OLGs). I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive OLGs). In contrast to deterministic infinitely lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.     

The Long-run Trade Pattern in a Growing Economy

We analyze the determinants of the trade pattern in a two-country growing economy. The long-run trade pattern depends on the structure of the absolute advantage as well as the comparative advantage, because the absolute advantage determines the terms of trade and the value of the marginal product of capital which affect the growth rate in our model. Moreover, we find that opening trade reduces or removes the difference in the growth rates of the two countries when the country lagging in the growth rate has a comparative advantage in a consumption commodity. Received June 18, 2001; revised version received July 16, 2002 Published online: April 30, 2003     

Financial frictions,interest rate dynamics,and international business cycle synchronization

A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.     

Country Size,Technology and Manufacturing Location

Country size, technology and trade costs jointly affect the location of manufacturing activity. In this paper, the combined effects of country size and technology differences on manufacturing location are examined in a simple new economic geography model. The specification yields a closed‐form, analytic relationship between measures of relative productivity, country size and trade costs. The patterns of agglomeration are consistent with recent empirical evidence. Market and supplier access favor manufacturing agglomeration in large countries for high to intermediate trade costs. High productivity countries, however small, are favored for low trade costs. The model's tractability facilitates welfare analysis.     

Trade,growth, and convergence in a dynamic Heckscher–Ohlin model

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher–Ohlin model—a combination of a static two-good, two-factor Heckscher–Ohlin trade model and a two-sector growth model—with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.     

Trade,Wages, and Specific Factors*

In this paper, we use a multisector specific‐factors model with sector‐specific capital and two mobile factors, skilled and unskilled labor, to examine the effects of trade, technology, and factor endowments on the skill premium in US manufacturing industries. Based on this model and data for the US manufacturing sector from 1958–96, we calculate changes in the skill premium and then carry out a decomposition to identify the changes caused by product price changes (trade), technological progress, labor, and capital endowment changes. The decomposition reveals that trade effects, working through product price changes, caused the skill premium to increase moderately. Changes in capital endowments (new investments) had a positive effect on the skill premium, with the strongest impact during the 1980s, while the effect of technological change on the skill premium varied over time. Finally, changes in relative labor endowments had a negative effect on the skill premium.     

Proof of global stability,transitional dynamics,and international capital flows in a two-country model of innovation and growth

Global stability properties of dynamic two-country models can be easily studied in the case of perfect international capital flows. With internationally constant relative productivities, balanced-growth path values for factor prices will hold on any path leading to the balanced-growth path unless one country experiences a period of no innovation. Innovation rates converge in the case of perfect international knowledge spillovers but long-run consumption levels and trade patterns are path-dependent. GDP per capita is predicted to converge slowly despite the presence of perfect international capital markets and no explicit inclusion of adjustment costs. The trade balance of the rich country is initially positive but after some time turns into a deficit.     

Do Preferential Rules of Origin Reverse Trade Creation and Trade Diversion?

Restrictive preferential rules of origin (PROOs) moderate the ‘trade diversion and trade creation’ effects of free trade agreements (FTAs). Moderation effects occur because restrictive PROOs reverse the increase in the relative price of non-member country goods initially caused by FTAs. Such a reversal arises because high compliance costs associated with restrictive PROOs lead to a lower utilization of tariff preferences by member countries. With a lower utilization, the increase in the relative price of non-members country goods would be smaller than it could have been with a full utilization. Thus, restrictive PROOs will lead to less than full trade diversion from non-members to member countries, and less than complete trade creation to member countries. This paper infers the effect of restrictive PROOs on intra-regional trade from the estimated parameters of the revenue function, on the presumption that trade diversion refers to a decrease in the elasticity of substitution between import sources, and that trade creation refers to a difference between the change in import price elasticity and the trade diversion effect. Empirical results support the conjecture that restrictive PROOs move in the opposite direction of FTAs partly undoing the trade diversion and trade creation effects of FTAs.     

Capital income taxation,depreciation allowances and economic growth: A perfect-foresight general equilibrium model

Conclusions The results indicated in Table 1 show that incomplete depreciation allowances reinforce the distortions in the equilibrium growth path brought about by an ideal capital income tax. A reduction in the deductible share of economic depreciation, like an increase in the tax rate, raises the current level of consumption, but reduces the steady state levels of consumption and capital per efficiency unit of labour.The reason for these distortions is that the tax law is able to drive wedges both between the rate of time preference and the market rate of interest, and between the latter and the marginal productivity of capital. The first wedge is created through capital income taxation as such and its size is directly related to the tax rate. The second wedge is created by the incomplete deductibility of depreciation. Its size is directly related to the tax rate and inversely to the deductible share of depreciation. For the distortion in the growth path of the economy it is the sum of the two wedges that counts. Therefore it is plausible that incomplete depreciation allowances reinforce the effects of capital income taxation.Knowing the determinants of the two wedges one can easily derive the influence of a tax reform on the marginal productivity of capital, the market rate of interest and the rate of time preference (cf. Table 2). In the short run, the system of these three interest rates is anchored by the marginal productivity of capital, and hence any measure that widens a wedge is translated into a reduction in the rate or those rates below the wedge. In the long run the system is anchored by the rate of time preference and an increase in the width of a wedge is translated into an increase in those rates or that rate above this wedge.The paper was written in association with the Sonderforschungsbereich 5 (Staatliche Allokationspolitik im marktwirtschaftlichen System).     

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.     

The importance of government commitment in attracting firms: A dynamic analysis of tax competition in an agglomeration economy

Agglomeration tendencies of industrial firms significantly affect the nature of tax competition. This paper analyzes tax competition between two countries over an infinite time horizon in an economy with trade costs and internationally mobile industrial firms. Most of the previous studies on tax competition in the ‘new economic geography’ framework employ static models. In this study, two governments dynamically compete with each other to attract firms through their choices of taxes and subsidies. It is shown that the commitment of the governments to their policies is crucial in determining the distribution of firms in the long run. Specifically, if governments find each others׳ tax policies credible, then one country will attract all the firms when trade costs are low enough to make agglomeration forces dominant. If policies are not credible, both countries may attract an equal share of firms even when trade costs are low, as the lack of commitment by governments acts as a dispersion force.     

The Location of Firms in Unionized Countries*

This paper develops a two‐country economic geography model with Cournot competition, where the labor markets are unionized so that trade unions bargain efficiently with each firm over wages and employment. Agglomeration forces are present due to wage premia obtained by the trade unions. It is shown that if the bargaining power of unions differs across countries then, as trade costs are reduced, the country with relatively weak unions gradually acquires all firms. However, for a range of trade costs, it is also a locally stable equilibrium for all firms to locate in the country with strong unions.     

Is growth corrupted or bureaucratic? Panel evidence from the enlarged EU

This article aims at analysing the issue of conditional convergence in the new enlarged European Union (EU) over the period 1995–2012 by means of panel data techniques. We examined the issue of conditional convergence in the enlarged EU giving particular attention to the effects of corruption and bureaucracy on growth controlling for a widely used set of explanatory variables such as investment (domestic and foreign), human capital formation, inflation, general government final consumption and trade openness. Furthermore, we examine if growth responds differently to corruption and bureaucracy in the new EU members by means of two group-specific interaction variables to capture possible different responses to corruption and bureaucracy. The analysis reveals evidence of conditional convergence in the enlarged EU, with investment share, foreign direct investment, human capital, and country openness appearing as robust growth drivers. In contrast, inflation and government consumption rather hamper growth. Furthermore, the effects of corruption and bureaucracy on growth seem to differ across old and new EU members.     

TOURISM,DUTCH DISEASE AND WELFARE IN AN OPEN DYNAMIC ECONOMY*

This paper examines the effects of an expansion in tourism on capital accumulation, sectoral output and resident welfare in an open economy with an externality in the traded good sector. An expansion of tourism increases the relative price of the nontraded good, improves the tertiary terms of trade and hence yields a gain in revenue. However, this increase in the relative price of nontraded goods results in a lowering of the demand for capital used in the traded sector. The subsequent de‐industrialization in the traded good sector may lower resident welfare. This result is supported by numerical simulations.     

Trade, Technology and UK Wage Inequality

This paper examines the impact of international trade and technical change on changes in the UK skill premium. We first measure trade as changes in product prices and technical change as TFP growth. Then we relate price and TFP changes to a set of underlying forces. Among our results are (a) changes in prices, not TFP, were the major force behind the rise in inequality in the 1980s; (b) changes in OECD prices and UK tariffs significantly raised 1980s skill premia through their effects on prices, and that industry concentration significantly raised 1980s skill premia through its effect on TFP.     

Savings, Volume of Trade, and Growth

This paper develops a two-country dynamic general equilibrium model with endogenous growth to analyze the effects of international trade on steady-stage growth. The two countries differ both in preferences and in technologies. It is shown first that both countries cannot simultaneously experience increases in consumption growth from trade. It is then shown that trade can increase output growth for both countries if the attitude towards saving matches the change in the terms of trade in each country. A country facing a decline (rise) in its output price grows faster if its intertemporal elasticity of substitution is sufficiently low (high).     

Price convergence in an online virtual world

This paper tests for the existence of price convergence using a unique data set from the largest online game, World of Warcraft. It provides a controlled setting without the usual obstacles that make testing price convergence difficult. These difficulties include trade barriers, transportation costs, imperfections and restrictions in capital markets, and differences in productivity growth. The data set consists of eight structurally identical copies, or worlds, of a virtual macroeconomy. We use the non-linear convergence test developed by Phillips and Sul (Econometrica 75(6):1771–1855, 2007), and find price convergence in all eight worlds. We further develop our own simple band of inaction test for price convergence, and under reasonable parameters find price convergence in all eight worlds.     

Location of vertically linked industries: agglomeration versus comparative advantage

This paper analyses the effects of trade liberalisation on the location of manufacturing firms that are vertically linked and differ in factor intensities. I extend the new economic geography literature, by embedding a model with vertical linkages within a Heckscher-Ohlin framework. I show that lower trade costs can lead to an agglomeration of all upstream and downstream firms in one country, even when they differ in factor intensities. These industrial location patterns do not always lead to factor price convergence; and may result in an increase in returns to both factors in the country where the agglomeration locates.