Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/260802 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9672
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper attempts to build up a Heckscher-Ohlin-Samuelson model of production and trade where capital is introduced outside the production process as a financial capital or credit as per the classical Ricardian wage fund framework. Stock of credit or financial capital as past savings, finances employment and machines or capital goods used in the process of production with Ricardian fixed coefficient technology. We derive the relationship between factor prices and rate of interest on one hand and relative price and endowments on the other. Availability of finance does not impact production or pattern of trade only nominal factor prices. International financial flows will not alter pattern of trade, but movement of labour and machines will. Such results change drastically when we consider a model with unemployment and finance dictates real outcomes much more than before. Introducing finance affects trade patterns with unemployment and especially with imperfect credit markets. The results could explain a vast array of stylized facts such as, financial crisis or shock, credit rationing and their impact on production, trade and unemployment. The paper has policy implications for role of financial development, quality of institutions in economic development.
Subjects: 
wage-fund
Heckscher-Ohlin-Samuelson
Ricardo
inequality
credit
general equilibrium
financial development
unemployment
trade
JEL: 
B12
B13
B17
F11
F63
F65
F16
O12
Document Type: 
Working Paper
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