International Trade and Investment Under Different Rates of Time Preference

42 Pages Posted: 13 Feb 2007

See all articles by Kyoji Fukao

Kyoji Fukao

Hitotsubashi University - Institute of Economic Research

Koichi Hamada

Yale University - Department of Economics

Date Written: October 1990

Abstract

This paper attempts to integrate the theory of trade with that of capital movements, and to study the two country world where each nation has a different rate of time preference. It resolves the indeterminacy problem intrinsic in the Heckscher-Ohlin model where trade and factor movements coexist by assuming that capital movements are infinitesimally more costly than trade in goods. Under certain assumptions, one can dichotomize the behavior of asset accumulation from the dynamic pattern of trade specialization. Complete specialization will take place most; likely in the country with a higher rate of time preference, which specializes into the more labor intensive sector. It is shown that a single-commodity model does exaggerate the amount of capital movements, but that the qualitative nature of asset accumulation patterns obtained in a single-commodity model of capital movements holds intact in the model that incorporates trade. This paper offers another explanation to the Feldstein-Horioka paradox that domestic investment responds more closely to increasing savings than capital outflows do. If an economy is imperfectly specialized, increased savings will be absorbed in capital deepening rather than in capital outflow.

Suggested Citation

Fukao, Kyoji and Hamada, Koichi, International Trade and Investment Under Different Rates of Time Preference (October 1990). NBER Working Paper No. w3457, Available at SSRN: https://ssrn.com/abstract=467652

Kyoji Fukao (Contact Author)

Hitotsubashi University - Institute of Economic Research ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan

Koichi Hamada

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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