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Working Paper, No. 2020-26, November 2020 Crossref
Trade Integration, Global Value Chains, and Capital Accumulation (REVISED May 2021)

Motivated by increasing trade and fragmentation of production across countries, accompanied by income convergence by many emerging economies, we build a dynamic two-country model featuring sequential, multi-stage production and capital accumulation. As trade costs decline over time, global-value-chain (GVC) trade expands across countries, particularly more in the faster growing country, consistent with the empirical pattern. Via Heckscher-Ohlin forces, GVC trade can generate back-and-forth feedback between comparative advantage and capital accumulation (growth). Moreover, GVC trade increases both steady-state and dynamic gains from trade.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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