On Terms of Trade and Capital Accumulation

This paper studies, within an OLG general equilibrium framework, the role of relative factor intensities in determining the relationship between the terms of trade and the capital stock. It shows that a diversified production equilibrium can be characterized by a positive association between these two variables if the investment sector is more labor-intensive and sector technologies are relatively dissimilar. Therefore, capital accumulation and terms-of-trade improvements do not require an import sector growing faster than the export sector when the latter is more capital-intensive. Large Stolper–Samuelson effects on factor incomes drive the results.