Staff Report 378

Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model

Timothy J. Kehoe | Consultant
Claustre Bajona

Revised October 9, 2008

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.

Published In: Review of Economic Dynamics (Vol. 13, No. 3, July 2010, pp. 487-513)

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