Monday, May 16, 2011

16 May 2011: Capital Goods Trade and Economic Development

Piyusha Mutreja
Syracuse University

We embed a multi-sector, multi-country Ricardian model of trade into a
neoclassical growth framework. We argue that international trade in
capital goods is crucial to understand cross-country di?erences in
capital formation and in income per worker. In our sample of 86
countries in 2005, over 80 percent of capital goods production in the
world is concentrated in 9 countries; poor countries import most of
their capital goods. Barriers to capital goods trade result in a
misallocation of factors both within and across countries. We
calibrate the model to bilateral trade ?ows. Our model accounts for 82
percent of the observed log variance in capital stock per worker, 53
percent in income per worker and 84 percent in the relative price of
capital goods. Furthermore, the elasticity of the relative price of
capital goods with respect to income per worker is -0.51 in the model
and -0.47 in the data, while the elasticity of the price of
consumption is 0.42 in the model and 0.51 in the data. Shutting down
trade in capital goods forces poor countries to allocate productive
resources away from the sector of their comparative advantage, thereby
reducing capital stock formation as well as TFP. The welfare cost of
such a shut down is 25 percent for countries in the bottom decile of
the income distribution.

Date: May 16, 2011
Time: 11:30 A.M.

Seminar Room 2,
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)


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