In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model-a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model-with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.
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✩ A preliminary version of this paper with the title “On Dynamic Heckscher–Ohlin Models II: Infinitely-Lived Consumers” was circulated in January 2003. Much of Kehoe’s plenary address at the 2009 Meeting of the Society for Economic Dynamics in Istanbul was based on the research developed in this paper. We are grateful for helpful comments an anonymous referee and from participants in conferences and seminars at the 2003 American Economic Association Meeting, the Universidad Carlos III de Madrid, the University of Pennsylvania, the International Monetary Fund, the Centre de Recerca en Economia del Benestar, the Instituto Autónomo Tecnológico de México, the 2004 CNB/CERGE-EI Macro Workshop in Prague, the Universitat Pompeu Fabra, Stanford University, the University of Texas at Austin, the Banco de Portugal, the University of Michigan, El Colegio de México, University of Oslo, European University Institute, XXXIV Simposio de la Asociación Española de Economía. We also thank Joann Bangs and Jaume Ventura for helpful discussions. Kehoe thanks the National Science Foundation for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. * Corresponding author at: University of Minnesota, United States. E-mail address: firstname.lastname@example.org (T.J. Kehoe).
- Economic growth
- International trade