TFP, Capital Deepening, and Gains from Trade

Abstract

Using a dynamic, multicountry model with capital accumulation, we compute the exact transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization and calculate the resulting welfare gains from trade. We find that while the dynamic gains are different across countries, consumption transition paths look similar except for scale. In addition, dynamic gains accrue gradually and are about 60 percent of steady-state gains for every country. Finally, the contribution of capital accumulation to dynamic gains is four times that of total factor productivity.