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Trade in Capital Goods

Trade in Capital Goods. By Jonathan Eaton and Samuel Kortum. There are a couple of good recent papers that look at equipment prices and growth or productivity Greenwood, Hercowitz, and Krusell, 1997. "Long-Run Implications of

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Trade in Capital Goods

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  1. Trade in Capital Goods By Jonathan Eaton and Samuel Kortum

  2. There are a couple of good recent papers that look at equipment prices and growth or productivity Greenwood, Hercowitz, and Krusell, 1997. "Long-Run Implications of Investment-Specific Technological Change". American Economic Review 873, 342-362. Uses Gordon's (1982) quality-adjusted prices for equipment to measure technological progress in capital goods production. Includes this in a standard neoclassical model and finds that it is large. Leads to a puzzle in that the productivity slowdown is even more severe once this quality correction is made. Nice paper. Restuccia and Urrutia, "Relative Prices and Investment Rates." http//www.chass.utoronto.ca/~diegor/research.html I think this paper is coming out in the JME. It argues that differences in the relative price of capital have strong explanatory power for differences in investment rates and provides a model and calibration of this.

  3. Jovanovic and Rob, "Solow versus Solow" http//www.econ.nyu.edu/user/jovanovi/ Argues that a vintage capital model (Solow 1960) does a better job of explaining differences in income levels across countries than a Solow 1956 model. Relative price of capital/equipment is used to measure distortions to capital across countries.

  4. Six Stylized Facts: • Rich Countries are specialized in • equipment production; • Poor countries import most of their equipment from only • a FEW developed countries; • Equipment trade displays • home bias; • Equipment investment as a share of GDP • has no relation to income per capita; • The relative price of equipment goods in terms • of consumption goods decline with income per capita;

  5. Stylized Facts • A small group of R&D intensive countries are the most specialized in equipment production; • Poor countries import much of their equipment, most of which comes from just a few large exporters;

  6. (continue) • Equipment is traded more than manufactures as whole, yet this trade displays home bias and other effects of geography; • The price of equipment (relative to the price of consumption goods) declines dramatically over time, and with development, reflecting technological innovations.

  7. A Textbook North-South Model

  8. Simplifying assumption: no international borrowing, implying that:

  9. TRADE

  10. Per Capita Income

  11. Rental price of capital compensate the owner of for the cost of capital,r, depreciation, and the falling price of capital, g. • Higher price of y in • the North by a factor • Falling price of • capital at rate g

  12. s=Saving rate

  13. Real output per capita grows in parallel, driven by • technological change occurs in the North • South specializes in y • North diversifies in y and k • real investment are higher in the rich country N • saving rates are similar across s and N • No borrowing across S and N; interest rates are higher in S It is the difference in the relative price of capital, not differences in in saving rates, that drive the correlation between output per capita and investment rate.

  14. Income per capita is negatively associated with the relative price of capital goods, which fall overtime at a rate g. Consistent with Young(1995), the model show no TFP growth, but in contrast, it is the technological change that drives capital accumulation, not thrift. An expanded model captures the feature that developing countries buy capital goods, which are heterogeneous, from wide range of sources, including themselves.

  15. Composite capital Country i provide type j with quality z Shipping cost from i to n Buying j, from I by Lowest effective cost Extreme-value distribution Distribution of cost Distribution of Minimum cost

  16. Three equations for the empirical implementation: Stock of knowledge Variability of quality Production cost Distribution of lowest cost source In place of bilateral trade share

  17. Implications for Equipment Prices: How equipment prices differ across countries • Estimations: • Production of Manufactures and equipment across countries • Trade in Manufactures and equipment • Investment and prices • Bilateral trade: gravity parameters

  18. Empirical Strategy First stage:Use trade volume and Price Equations to generate Infered Capital Good Price Series

  19. Second Stage:Connecting Steady State Productivity Levels with Savings Rates and Relative Price of Capital Goods

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