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Dynamic two‐country Heckscher–Ohlin model with externality
Author(s) -
Iwasa Kazumichi,
Nishimura Kazuo
Publication year - 2014
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12027
Subject(s) - autarky , economics , externality , microeconomics , work (physics) , capital (architecture) , general equilibrium theory , production (economics) , market economy , thermodynamics , physics , history , archaeology , welfare
Abstract We extend a dynamic Heckscher–Ohlin model with production externality presented in recent work by Nishimura and Shimomura by assuming a consumable capital good. Following work by Bond, Iwasa, and Nishimura, we define a steady‐state excess demand function and derive the locus of home and foreign capital stocks that are consistent with a steady‐state equilibrium under free trade. Also, we examine the relationship between externality and local dynamics in autarky or under free trade, which includes a phase diagram analysis. Then we show that opening trade can generate expectation‐driven fluctuations in a world trade market.