Cremers, Emily

Macroeconomic Dynamics Vol. 9 no. 5 (2005): 585-611.

This paper examines the dynamic effects of international commodity trade by mergingtwo benchmark environments, namely, the static factor endowments model and theneoclassical growth model. Two main questions are asked. First, how does commoditytrade affect the capital-accumulation paths of two trade partners? Second, do the welfareeffects associated with these dynamics serve to reinforce or mitigate the well-knownwelfare effects associated with the static factor endowments model? It is demonstratedthat trade will eventually, if not immediately, narrow the difference in domestic capitalaccumulation paths. This narrowing introduces a negative welfare effect that is largeenough to worsen overall welfare for the country whose capital accumulation hasdeclined. Thus, although the dynamic effects of trade are large enough to dominate

Keywords: Gains from Trade; Neoclassical Growth; Overlapping Generations