Trade and Indeterminacy in a Dynamic General Equilibrium Model


This paper introduces sector-specific externalities in the Heckscher-Ohlin two-country dynamic general equilibrium model to show that indeterminacy of the equilibrium path in the would market can occur. Under certain conditions in terms of factor intensities, there are multiple equilibrium paths from the same initial distribution of capital in the world market, and the distribution of capital in the limit differs among equilibrium paths. One equilibrium path converges to a long-run equilibrium in which the international ranking of factor endowment ratios differs from the initial ranking and another equilibrium path keep the initial ranking and converges to another long-run equilibrium. Since it is indeterminate which path is realized, so is the long-run trade pattern. Therefore the Long-Run Heckscher--Ohlin prediction is vulnerable to the introduction of externality.

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