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Trade in Capital Goods By Jonathan Eaton and Samuel Kortum.

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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, "Long-Run Implications of Investment-Specific Technological Change". American Economic Review 873, 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; ºPoor countries import most of their equipment from only a FEW developed countries; ºEquipment trade displays home bias; ºEquipment investment as a share of GDP has no relation to income per capita; ºThe 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

12 Rental price of capital compensate the owner of for the cost of capital,r, depreciation, and the falling price of capital, g. ºHigher price of y in the North by a factor ºFalling price of capital at rate g

13

14 s=Saving rate

15 ºReal output per capita grows in parallel, driven by ºtechnological change occurs in the North ºSouth specializes in y ºNorth diversifies in y and k ºreal investment are higher in the rich country N ºsaving rates are similar across s and N ºNo 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.

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

17 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

18 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

19 Implications for Equipment Prices: How equipment prices differ across countries ºEstimations: ºProduction of Manufactures and equipment across countries ºTrade in Manufactures and equipment ºInvestment and prices ºBilateral trade: gravity parameters

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

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


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