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The Marginal Product of Capital, Capital Flows, and Convergence

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  • Sirsha Chatterjee
  • Kanda Naknoi

Abstract

The neoclassical theory of economic growth suggests that capital inflows raise the speed of convergence because foreign financial capital is transformed into physical capital. We propose a new methodology to quantify the size of capital inflows which are transformed into physical capital. We use the predicted scale to calculate the output gains from capital flows. Our methodology takes into account cross-country differences and fluctuations in the price of investment goods relative to output. The theory predicts that inefficiency in producing investment goods reduces the gains from capital inflows. A sizable fraction of capital inflows is found to be transformed into physical capital in only a few countries. However, the gains are found to be extremely small.
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Suggested Citation

  • Sirsha Chatterjee & Kanda Naknoi, 2010. "The Marginal Product of Capital, Capital Flows, and Convergence," American Economic Review, American Economic Association, vol. 100(2), pages 73-77, May.
    • Handle: RePEc:aea:aecrev:v:100:y:2010:i:2:p:73-77
    Note: DOI: 10.1257/aer.100.2.73
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    Cited by:

    1. Ly Dai Hung, 2019. "Empirics for Marginal Product of Capital," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-14, December.
    2. Carter, Patrick & Postel-Vinay, Fabien & Temple, Jonathan, 2015. "Dynamic aid allocation," Journal of International Economics, Elsevier, vol. 95(2), pages 291-304.
    3. Lin, S. & Han, H., 2018. "Government size, institutional quality, and capital flows across regions in China: a specific exploration on the failure of capital flows across Shanhai Pass," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277515, International Association of Agricultural Economists.
    4. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1484-1515.
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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