This paper develops a general equilibrium two country, two commodity dynamic simulation model of international trade in commodities and financial claims. The model generalizes the Heckscher-Ohlin static theory of trade by incorporating costs of quickly adjusting levels of capital stocks in particular industries; i.e., capital mobility in the short run is permitted, but at a price. The model predicts Heckscher-Ohlin relationships, including factor price equalization, in the long-run, but not during the economy's transition path to its ultimate steady-state. An interesting feature of the model is that it provides a determinate solution to the long-run inter- national allocation of the world's capital stock. This is true despite the fact that the Rybchinski-theorem holds in the long-run. The simulation model of international trade with costly capital stock adjustment appears capable of explaining many features of the patterns of factor price equalization, international investment, and changes in comparative advantage that have characterized the post-war period.
*Published:
RECD, Vol. 2, no. 3 (July 1999): 532-574.
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