International trade and cross-country capital composition

Abstract

Most of the world’s equipment is produced in a small number of rich countries. In 1996, countries in the top decile of cross-country income distribution produced 61% of world equipment and countries in the bottom decile produced only 0.2%. Rich and poor countries also differ in their dependence on imports for equipment. In 1996, poor countries imported more than half of their equipment. Structures, on the other hand, are largely domestically produced. World pattern of production and trade in equipment and structures is potentially an important determinant of composition of capital across countries. The composition of capital differs significantly across rich and poor countries. In 1996, equipment constituted over 21% of the capital in 5 richest countries and only 8% in 5 poorest countries. While equipment capital-output ratio was a factor of more than 6 between rich and poor countries, structures capital-output ratio was less than a factor of 2. In this dissertation, I determine the quantitative relationship between international trade and cross-country capital composition. I, then, utilize the results on this relationship to examine the implications for economic development. The starting point of my analysis is a multi-country model of trade in capital goods. There are three tradable sectors: equipment, structures and intermediate goods. Countries differ in their average level of productivity in each of the tradable sectors. International trade is subject to bilateral iceberg costs, which comprise of tariff and non-tariff barriers to trade. The theoretical model implies that the composition of capital is a function of country-specific productivity parameters and bilateral