International Capital Mobility and Factor Reallocation in a Multisector Economy

This paper examines the effects of international capital flows in a small open economy utilizing a dynamic general equilibrium framework based on a three-sector Ramsey growth model. In order to analyze the impact of international capital mobility on production, consumption and allocation of resources across three sectors, two different economic environments are modeled. The first model represents an open economy with capital mobility (a more comprehensive environment), and the second model introduces a closed economy with without capital mobility. Numerical applications of the models use data from the Turkish economy for the year 2002. The numerical results demonstrate that the presence of capital mobility, despite being limited by a borrowing constraint, reverses the impact of economic growth on production and resource allocation. The results also show that while production in the closed economy model simply adjusts to domestic demand, That of the open economy model is not constrained by it. Results further point that although there is positive growth in income and output in both environments, income growth in the capital mobility environment falls short of that of the environment without capital mobility. This result can be attributed to the relatively slower accumulation of capital in the former, which may be compensated by a positive rate of technological progress to accompany international capital flows.