Trade in Capital Goods

By

Jonathan Eaton and Samuel Kortum

There are a couple of good recent papers that look at equipment pricesand growth or productivity

Greenwood, Hercowitz, and Krusell, 1997. "Long-Run Implications ofInvestment-Specific Technological Change". American Economic Review873, 342-362. Uses Gordon's (1982) quality-adjusted prices forequipment to measure technological progress in capital goods production.Includes this in a standard neoclassical model and finds that it islarge. Leads to a puzzle in that the productivity slowdown is even moresevere 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 iscoming out in the JME. It argues that differences in the relative priceof capital have strong explanatory power for differences in investmentrates and provides a model and calibration of this.

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 ofexplaining differences in income levels across countries than a Solow1956 model. Relative price of capital/equipment is used to measuredistortions to capital across countries.

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 displayshome bias;

ºEquipment investment as a share of GDPhas no relation to income per capita;

ºThe relative price of equipment goods in terms of consumption goods decline with income per capita;

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;

(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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Consistent with Young(1995), the modelshow no TFP growth, but in contrast, it is the technological change that drives capital accumulation, not thrift.

Income per capita is negatively associated withthe relative price of capital goods, which fall overtimeat a rate g.

An expanded model captures the feature that developingcountries buy capital goods, which are heterogeneous, fromwide range of sources, including themselves.

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Three equations for the empirical implementation:

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Implications for Equipment Prices:

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How equipment prices differ across countries

ºEstimations:ºProduction of Manufactures and equipment across countriesºTrade in Manufactures and equipmentºInvestment and pricesºBilateral trade: gravity parameters

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First stage:Use trade volume and Price Equations to generateInfered Capital Good Price Series

Empirical Strategy

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