Working Paper: NBER ID: w0773
Authors: Laurence J. Kotlikoff; Edward E. Learner; Jeffrey Sachs
Abstract: This paper develops a general equilibrium two country, two commodity dynamic simulation model of international trade in commodities and financial claims. The model generalizes the Heckscher-Ohlin static theory of trade by incorporating costs of quickly adjusting levels of capital stocks in particular industries; i.e., capital mobility in the short run is permitted, but at a price. The model predicts Heckscher-Ohlin relationships, including factor price equalization, in the long-run, but not during the economy's transition path to its ultimate steady-state. An interesting feature of the model is that it provides a determinate solution to the long-run inter- national allocation of the world's capital stock. This is true despite the fact that the Rybchinski-theorem holds in the long-run. The simulation model of international trade with costly capital stock adjustment appears capable of explaining many features of the patterns of factor price equalization, international investment, and changes in comparative advantage that have characterized the post-war period.
Keywords: International trade; Capital mobility; Factor price equalization
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international economic changes (F69) | U.S. economy's poor performance (P17) |
| external capital accumulation in other countries (F21) | diminishing share of U.S. in global capital (F62) |
| adjustment costs associated with capital mobility (F32) | transitional dynamics preventing immediate factor price equalization (F16) |
| short-run industrial allocation of capital (E22) | labor allocation (J22) |
| degree of international investment (F21) | profitability differences across countries (F23) |