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POVERTY TRAPS AND INFERIOR GOODS IN A DYNAMIC HECKSCHER–OHLIN MODEL

Published online by Cambridge University Press:  09 May 2012

Eric W. Bond ,
Kazumichi Iwasa  and
Kazuo Nishimura
Eric W. Bond
Affiliation:
Vanderbilt University
Kazumichi Iwasa
Affiliation:
KIER, Kyoto University
Kazuo Nishimura*
Affiliation:
KIER, Kyoto University
*
Address correspondence to: Kazuo Nishimura, KIER, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan; e-mail: [email protected].
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Abstract

We extend the dynamic Heckscher–Ohlin model in Bond et al. [Economic Theory (48, 171–204, 2011)] and show that if the labor-intensive good is inferior, then there may exist multiple steady states in autarky and poverty traps can arise. Poverty traps for the world economy, in the form of Pareto-dominated steady states, are also shown to exist. We show that the opening of trade can have the effect of pulling the initially poorer country out of a poverty trap, with both countries having steady state capital stocks exceeding the autarky level. However, trade can also pull an initially richer country into a poverty trap. These possibilities are a sharp contrast with dynamic Heckscher–Ohlin models with normality in consumption, where the country with the larger (smaller) capital stock than the other will reach a steady state where the level of welfare is higher (lower) than in the autarkic steady state.

Keywords

Dynamic Heckscher–Ohlin ModelPoverty TrapsInferior Goods
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Special Issue 6: Equality, Public Insurance, and Monetary Policy , September 2013 , pp. 1227 - 1251
Copyright
Copyright © Cambridge University Press 2012 

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References

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