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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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Abstract

Income differences across countries are enormous. In this paper, I quantify a novel channel through which countries gain from equipment trade: composition of capital. Over time, while the rich-poor gap in the aggregate capital-output ratio has been relatively stable, composition of capital has evolved considerably: the share of equipment has increased in rich countries and declined in many poor countries. Using a multi-country Ricardian trade model, I quantify the impact of the 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 nearly one-half of these 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 their total factor productivity.

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