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Trade, investment and debt in a two-country growth model

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  • Koch, Karl-Josef

Abstract

We study a dynamic version of a Heckscher-Ohlin model with two countries, two factors and two sectors of production. It is based on the neoclassical growth model by Oniki and Uzawa (1965). We remove their balance of payments restriction by introducing an international market for equity shares of the type used by Hori and Stein (1977). We solve the indeterminacy problem of the capital market in case of factor price equalization by making explicit assumptions on the investment behavior. Two extreme cases are considered which correspond to different attitudes towards domestic versus foreign investment. The model has a unique and globally stable steady state with factor price equalization. Along the adjustment path international debt serves the purpose of increasing efficiency. In the long run holding foreign equity shares can bridge the gap between two possibly conflicting goals: efficiency requires similar factor endowments whereas different consumer preferences establish the need of an uneven income distribution. If consumers are different enough, there will be unbalanced trade and international debt in the long run.

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  • Koch, Karl-Josef, 1991. "Trade, investment and debt in a two-country growth model," Discussion Papers, Series II 146, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:146
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    References listed on IDEAS

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    1. Murray C. Kemp, 1968. "International Trade and Investment in a Context of Growth," The Economic Record, The Economic Society of Australia, vol. 44(2), pages 211-223, June.
    2. H. Oniki & H. Uzawa, 1965. "Patterns of Trade and Investment in a Dynamic Model of International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(1), pages 15-37.
    3. Hori, Hajime & Stein, Jerome L, 1977. "International Growth with Free Trade in Equities and Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 83-100, February.
    4. Albert, Max, 1989. "Capital mobility and costs of adjustment," Discussion Papers, Series II 96, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    5. Stanley Fischer & Jacob A. Frenkel, 1974. "Interest Rate Equalization and Patterns of Production, Trade and Consumption in a Two‐country Growth Model," The Economic Record, The Economic Society of Australia, vol. 50(4), pages 555-580, December.
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