Working Paper: NBER ID: w1479
Authors: Jonathan Eaton
Abstract: In a dynamic economy land and capital serve not only as factors of production but as assets which individuals use to transfer income from workinq periods to retirement. Static models of international trade based on the specific-factors model incorporate only the first of these. Once the second is recognized the supply of capital and evaluation of land can be derived from underlying intertemporal optimization behavior.Changes in the terms of trade and in the endowments of fixed factors do not necessarily have the same effects on factor prices and the composition of output as they do in the static specific-factors model. Changes in these variables affect both total savings and the amount of savings that is diverted toward investment in land. Results derived from the traditional static model are more likely to emerge when the sector using land as a factor of production has a higher labor share than the sector using capital. In this case the land-using sector dominates factor markets more than asset markets.
Keywords: international trade; dynamic model; specific factors; capital; land
JEL Codes: F11; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in the value of land (Q15) | capital supply (E22) |
| permanent increase in the relative price of a land-using commodity (Q31) | lower steady-state welfare of a large exporter (D69) |
| permanent increase in the relative price of a land-using commodity (Q31) | divert savings from capital investment (G31) |
| increase in labor force (J21) | raise steady-state capital stock (E22) |
| raise steady-state capital stock (E22) | increase wages (J38) |
| raise steady-state capital stock (E22) | lower interest rates (E43) |
| labor share in land-using sector exceeds that in capital-using sector (E25) | static model's predictions more likely to hold (C53) |