Trade%20in%20Capital%20Goods

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Trade in Capital Goods

• By
• Jonathan Eaton and Samuel Kortum

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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-Specifi
c 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/resear
ch.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.
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Jovanovic and Rob, "Solow versus
Solow" http//www.econ.nyu.edu/user/jovanovi/ Argue
s 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.
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• 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

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Stylized Facts

• A small group of RD 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

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(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.

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A Textbook North-South Model
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Simplifying assumption no international
borrowing, implying that
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TRADE
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Per Capita Income
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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

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sSaving rate
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• 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.
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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.
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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
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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
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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

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Empirical Strategy
First stageUse trade volume and Price Equations
to generate Infered Capital Good Price Series
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Second StageConnecting Steady State Productivity
Levels with Savings Rates and Relative Price of
Capital Goods