Working Paper: CEPR ID: DP2973
Authors: Daron Acemoglu; Jaume Ventura
Abstract: We show that even in the absence of diminishing returns in production and technological spillovers, international trade leads to a stable world income distribution. This is because specialization and trade introduce de facto diminishing returns ? countries that accumulate capital faster than average experience declining export prices, depressing the rate of return to capital and discouraging further accumulation. Because of diminishing returns to capital accumulation at the country level, the cross-sectional behaviour of the world economy is similar to that of existing exogenous growth models. Cross-country variation in economic policies, savings and technology translate into cross-country variation in incomes, and country dynamics exhibit conditional convergence as in the Solow-Ramsey model. The dispersion of the world income distribution is determined by the forces that shape the strength of the terms of trade effects ? the degree of openness to international trade and the extent of specialization. Finally, we provide evidence that countries accumulating faster experience a worsening in their terms of trade. Our estimates imply that, all else equal, a 1% faster growth is associated with approximately a 0.7% decline in the terms of trade.
Keywords: Cross-country income differences; Endogenous growth; International trade; Specialization; Terms of trade effects
JEL Codes: F12; F43; O40; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Declining export prices (F14) | Reduced value of the marginal product of capital (D24) |
| Reduced value of the marginal product of capital (D24) | Discourages further accumulation (D15) |
| Faster capital accumulation (E22) | Discourages further accumulation (D15) |
| Terms of trade effects (F14) | Dispersion of world income distribution (D31) |
| Cross-country differences in economic policies, saving rates, and technology (O57) | Differences in relative incomes (D31) |
| Faster capital accumulation (E22) | Declining export prices (F14) |