The Dependent Economy Model With Both Traded And Nontraded Capital Goods
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Author | : Philip Lawton Brock |
Publisher | : |
Total Pages | : 56 |
Release | : 1993 |
Genre | : Capital investments |
ISBN | : |
This paper resolves a long-standing obstacle in the development and use of the dependent economy model with investment. This obstacle derives from the fact that models of the dependent economy with investment have been criticized for arbitrarily assuming that capital is either tradable or nontradable, and for choosing either the traded or nontraded sector to be capital intensive. The model incorporates both types of capital and shows that it is the relative sectoral intensity of nontraded capital that matters for the dynamic adjustment of the relative price of nontradables. When the traded sector is relatively intensive in nontraded capital, the saddlepath is flat (at the long-run value of the relative price of nontradables). When the nontraded sector is relatively intensive in nontraded capital, the saddlepath is negatively sloped. The relative sectoral intensity of traded capital primarily affects the adjustment of the current account. In particular, we consider the role of the complementarity or substitutability of traded and nontraded capital in the production structure on the behavior of the current account. The dynamic behavior of the model is illustrated by considering a permanent increase in foreign transfers.
Author | : Philip L. Brock |
Publisher | : |
Total Pages | : 40 |
Release | : 1993 |
Genre | : |
ISBN | : |
Author | : Rudolfs Bems |
Publisher | : International Monetary Fund |
Total Pages | : 54 |
Release | : 2008-02 |
Genre | : Business & Economics |
ISBN | : |
This paper shows that aggregate investment expenditure shares on tradable and nontradable goods are very similar across countries and regions. Furthermore, the two expenditure shares have remained close to constant over time, with the average expenditure share on nontradables varying between 0.54-0.62 over the 1960-2004 period. These empirical findings offer a new restriction for two-sector models of the aggregate economy. Combined with the fact that the relative price of nontradables correlates positively with income and exhibits large differences across space and time, our findings suggest that tradable and nontradable goods in investment can be modeled using the Cobb-Douglas aggregator.
Author | : Charles M. Engel |
Publisher | : |
Total Pages | : 26 |
Release | : 2007 |
Genre | : |
ISBN | : |
We examine a model of a small open economy in which there is free international mobility of financial capital, investment in capital goods and a non-traded good. Such an environment is rich enough to explain several phenomena that are inexplicable in more barren models. We suggest an explanation of why saving and investment may be correlated even with no restrictions on trade in assets. We explain why a high saving country may nonetheless borrow from abroad to finance investment. We also provide an optimizing model of stages in the balance of payments.
Author | : Piyusha Mutreja |
Publisher | : |
Total Pages | : 40 |
Release | : 2017 |
Genre | : |
ISBN | : |
International trade in capital goods has quantitatively important effects on economic development through two channels: capital formation and aggregate TFP. We embed a multi country, multi sector Ricardian model of trade into a neoclassical growth framework. Our model matches several trade and development facts within a unified framework: the world distribution of capital goods production and trade, cross-country differences in investment rate and price of final goods, and cross-country equalization of price of capital goods. Reducing barriers to trade capital goods allows poor countries to access more efficient means of capital goods production abroad, leading to relatively higher capital output ratios. Meanwhile, poor countries can specialize more in their comparative advantage--non-capital goods production--and increase their TFP. The income gap between rich and poor countries declines by 40 percent by eliminating barriers to trade capital goods.
Author | : Anirban Sengupta |
Publisher | : |
Total Pages | : 0 |
Release | : 2019 |
Genre | : |
ISBN | : |
This paper studies, how allowing foreign capital flows in a developing economy will impact the inter-sector dynamics in terms of allocation of factors of production, relative output and real exchange rate. This paper introduces foreign capital flows to the theory of structural change and unbalanced economic growth (which is predominantly a closed economy framework).The theory of structural change and unbalanced economic growth takes a contrarian view to the standard growth theoretical models based on “Kaldor Facts”. This theory states that as an economy grows and accumulates capital, the sector that has more income elastic consumption and greater capital intensity grows faster than the sector which has a lower income elastic consumption and lower capital intensity. This asymmetric growth leads to unbalanced economic growth and change in relative price among the sectors. Such divergence in sector-wise growth rates is in contrary to the traditional growth theory (which is based on “Kaldor Facts”).This paper has proposed a developing open economy model having two sectors namely traded sector and non-traded sector. The traded sector has higher income elastic consumption along with higher capital intensity & productivity growth as compared to the non-traded sector. The economy has demand side imbalances in form of non-homothetic preferences. The supply side imbalances is in the form of different capital intensity along with different growth rate of productivity across sectors. We have derived the path of aggregate capital stock per unit of labor, sector-wise allocation of factors of production (capital and labor) and relative price path of non-traded to traded sector goods. The results indicate that as an economy grows and accumulates capital, the factors of production start moving out from non-traded sector to traded sector. As a result, the traded sector starts to grow faster than that of non-traded sector. Also the relative price of non-traded sector to the traded sector goods rises (real exchange rate appreciates) with capital accumulation in the economy thereby creating additional pressure on inflation. This inflationary pressure adversely affects competitiveness of domestic firms in international markets and make domestic investment less attractive. Our findings can be linked with the workings of Kalecki (1955) i.e. “The problem of financing economic development” where it states that as an economy grows the subsistence sector shrinks as compared to the income elastic sector. This causes the aggregate price levels to increase.This paper not only extends the theory of structural change and unbalanced economic growth to open economy framework but also introduces non-homothetic preferences to traditional open economy literature which is based on Dependent Economy Framework which predominantly assumes homothetic preferences.
Author | : Martín Uribe |
Publisher | : Princeton University Press |
Total Pages | : 646 |
Release | : 2017-04-04 |
Genre | : Business & Economics |
ISBN | : 0691158770 |
A cutting-edge graduate-level textbook on the macroeconomics of international trade Combining theoretical models and data in ways unimaginable just a few years ago, open economy macroeconomics has experienced enormous growth over the past several decades. This rigorous and self-contained textbook brings graduate students, scholars, and policymakers to the research frontier and provides the tools and context necessary for new research and policy proposals. Martín Uribe and Stephanie Schmitt-Grohé factor in the discipline's latest developments, including major theoretical advances in incorporating financial and nominal frictions into microfounded dynamic models of the open economy, the availability of macro- and microdata for emerging and developed countries, and a revolution in the tools available to simulate and estimate dynamic stochastic models. The authors begin with a canonical general equilibrium model of an open economy and then build levels of complexity through the coverage of important topics such as international business-cycle analysis, financial frictions as drivers and transmitters of business cycles and global crises, sovereign default, pecuniary externalities, involuntary unemployment, optimal macroprudential policy, and the role of nominal rigidities in shaping optimal exchange-rate policy. Based on courses taught at several universities, Open Economy Macroeconomics is an essential resource for students, researchers, and practitioners. Detailed exploration of international business-cycle analysis Coverage of financial frictions as drivers and transmitters of business cycles and global crises Extensive investigation of nominal rigidities and their role in shaping optimal exchange-rate policy Other topics include fixed exchange-rate regimes, involuntary unemployment, optimal macroprudential policy, and sovereign default and debt sustainability Chapters include exercises and replication codes
Author | : Steve Brito |
Publisher | : International Monetary Fund |
Total Pages | : 21 |
Release | : 2018-05-10 |
Genre | : Business & Economics |
ISBN | : 1484356349 |
We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.
Author | : Nicolas Guigas |
Publisher | : |
Total Pages | : 147 |
Release | : 2003 |
Genre | : |
ISBN | : |
This thesis investigates the behavior of a dependent economy within a dynamic two-sector, two-factor model. The economy produces a traded good and non-traded structures used as housing or as productive factors. In contrast to the existing literature, the structures are non-consumable. We analyze the impact of different shocks on the economy. We find that positive and whealth-enhancing shocks almost always lead to an increase in the capital stock and to a deterioration of the current account. This result holds irrespectively of relative sectoral intensities. It is not restricted to cases where the non-traded sector is more capital intensive, which is the standard result in the literature with consumable non-traded goods. Our model provides a framework to explain the behavior of real estate markets and current accounts in South East Asian countries hit by the crisis in 1997 as well as in economies benefiting from foreign transfers such as Ireland.
Author | : Sergii Meleshchuk |
Publisher | : International Monetary Fund |
Total Pages | : 35 |
Release | : 2020-05-22 |
Genre | : Business & Economics |
ISBN | : 1513545272 |
In this paper we demonstrate the importance of distinguishing capital goods tariffs from other tariffs. Using exposure to a quasi-natural experiment induced by a trade reform in Colombia, we find that firms that have been more exposed to a reduction in intermediate and consumption input or output tariffs do not significantly increase their investment rates. However, firms’ investment rate increase strongly in response to a reduction in capital goods input tariffs. Firms do not substitute capital with labor, but instead also increase employment, especially for production workers. Reduction in other tariff rates do not increase investment and employment. Our results suggest that a reduction in the relative price of capital goods can significantly boost investment and employment and does not seem to lead to a decline in the labor share.