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Composition of Capital and Gains from Trade in Equipment

Mutreja, Piyusha (2016): Composition of Capital and Gains from Trade in Equipment.

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Income differences across countries are enormous. In this paper, I quantify a novel channel through which countries gain from equipment trade: composition of capital. During 1985-2005, while the rich-poor gap in aggregate capital-output ratio is relatively stable, composition of capital evolved substantially: share of equipment increased in rich countries and it declined in many poor countries. Using a multi-country Ricardian model of trade, I quantify the impact of 1985-2005 fall in equipment trade barriers on capital composition and incomes. The decline in trade barriers accounts for approximately one-third of the changes in equipment capital shares. All countries gain income and 45 percent of the gains are transmitted via the capital composition channel. Poor countries benefit predominantly through the capital composition channel and rich countries gain mostly through increases in total factor productivity.

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