Dynamic Patterns of Trade Imbalance and Asset-Debt Position with Adjustment Costs of Investment

Abstract

Dynamic patterns of trade imbalance and asset-debt position are analyzed employing a model of two countries, one good, two primary inputs, and identi - cal technologies and preferences with investment adjustment costs. The coun - tries are assumed to have different initial per capita physical capital endow - ments and foreign assets. Our model covers both types of adjustment cost – Uzawa[1965]’s Penrose effect type and Eisner and Strotz[1963]’s type. First, the system is shown to be globally stable (Theorem 1). Then, Theorem 2 shows that if the per capita capital stocks of both countries increase over time or the capital stock of the foreign country increases while that of the home country decreases, and if the home country is rich in both initial physical capital endowments and foreign assets, then the home country either initially exports goods but eventually becomes an importer or she always imports goods. In either case she remains a creditor