Chapter 6 Capital theory and trade theory

In a major survey of the theory of international trade, dynamic trade theory calls for further, systematic analysis and synthesis, and notes the negligible dent made so far by intermediate and capital goods in the theoretical models employed by analysts of international trade. This chapter surveys the progress that has now been made in incorporating capital goods into trade theory and discusses the dynamic models of trade and growth. Within this model, it is possible to develop a treatment of welfare economics that broadly follows the well-known static theory of the gains from trade although with some important features peculiar to intertemporal theory. Few positive-economic results are obtainable within such a general model. The chapter also provides two alternative ways of simplifying the general model so as to obtain useful results: reducing the number of goods, factors, and time-periods ill the model, or considering only steady states. Results in particular cases, which turn out to be similar to the standard results in models without capital, may not be sufficient to show that capital makes no difference. The chapter provides steady-state analysis: when a comparative dynamic result in steady state is formally very similar to a comparative static result in a timeless model it tempts to give the former result the same title as the latter, but such terminology may sometimes be misleading.