Working Paper: CEPR ID: DP3322
Authors: Alejandro Cuat; Marco Maffezzoli
Abstract: We construct and numerically solve a dynamic Heckscher-Ohlin model in which the initial distribution of production factors in the world makes worldwide factor price equalization impossible, and leads countries to group in two diversification cones. We study the dynamics of income per capita and factor prices. Our results suggest that the Ramsey model under complete specialization overcomes several shortcomings of its autarky and factor price equalization counterparts. In comparison with the autarky model, for example, it can produce similar transitional dynamics and account for important cross-sectional differences in the levels and growth rates of income per capita while generating much smaller rental-rate differentials across countries. Moreover, it does not necessarily yield convergence in levels for identically parameterized economies. All in all, the Ramsey/Complete Specialization model seems to provide a better benchmark from which to depart when studying the dynamic behaviour of countries and cross-sectional differences in income per capita levels and growth rates.
Keywords: Convergence; Economic Growth; Heckscher-Ohlin; International Trade; Simulation
JEL Codes: F10; F40; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial capital endowments (D29) | growth rates (O40) |
| initial distribution of production factors (D39) | income per capita levels (D31) |
| initial distribution of production factors (D39) | growth rates (O40) |
| trade regimes (F13) | economic outcomes (F61) |
| shocks (E32) | previous growth paths (O41) |
| income per capita levels (D31) | investment rates (G31) |