Capital Accumulation and Dynamic Gains from Trade

Abstract

We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths for 44 countries following a trade liberalization. We find that (i) larger countries accumulate a current account surplus and financial resources flow from larger countries to smaller countries boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset (NFA) position before the liberalization and the tradables intensity in investment goods production and consumption goods production are quantitatively important for the gains.JEL codes: E22, F11, O11

Emerging Markets and the New Geography of Trade: The Effects of Rising Trade Barriers

“…Hence, this type of model has been mostly implemented in static environments (Parro, 2013). Recent works have made progress in extending these models to dynamic environments (Eaton et al, 2016;Reyes-Heroles, 2017;Ravikumar et al, 2019;Caliendo et al, 2019); however, these works do not incorporate heterogeneity nearly as rich as in our baseline calibration. 43…”

“…Our model is most closely related to Parro (2013), who incorporates multiple factors of production and capital-skill complementarity into a multi-sector extension of Eaton and Kortum (2002) with input-output linkages (Caliendo and Parro, 2015;Levchenko and Zhang, 2016). We add endogenous investment, building on Alvarez (2017) and Ravikumar et al (2019). The multi-factor and investment channels play a key role in shaping the response of different EMs to trade shocks but have been absent from quantitative analyses of recent tariff hikes (e.g., Charbonneau and Landry (2018); IMF (2019)).…”

“…This requirement generates computational challenges as the new steady state of the model becomes endogenous to the relevant shock and initial conditions. An exception would be a model without capital accumulation in which the economy would reach the new steady state immediately after a shock.42Mendoza and Tesar (1998) andReyes-Heroles (2017) are examples of work that incorporate the wealth effects of changes in tax policy and trade barriers, respectively, in multi-country models.43 Most of these works consider a limited number of sectors (four at the most)(Eaton et al, 2016;Reyes-Heroles, 2017;Ravikumar et al, 2019) rather than the 40 in our baseline calibration; at the most two factors of production and therefore no capital-skill complementarity; a no international financial markets(Caliendo et al, 2019).…”

Trade Integration, Global Value Chains, and Capital Accumulationhttps://www.chicagofed.org/~/media/publications/working-papers/2020/wp2020-26-pdf.pdf

“…Countries with faster productivity growth have higher investment rates, as in the standard neoclassical growth model. Trade integration induces further capital deepening as in the trade literature (see Ravikumar, Santacreu, and Sposi, 2019). What is new here is that countries with increasing comparative advantage in capital-intensive stages have yet even higher investment rates.…”

“…Most of the studies in this literature model supply chains using a spider framework in a static setting. Several papers include capital accumulation in multi-country multi-sector trade models (i.e., Alvarez, 2017;Levchenko and Zhang, 2016;Ravikumar, Santacreu, and Sposi, 2019). In addition to lower trade costs boosting investment and capital accumulation, our model has H-O forces, which give rise to crosscountry differences in investment dynamics.…”