Agriculture Reference
In-Depth Information
rate s then
r
j
= r
w
(1+π
j
)
where
π
j
is a region-specific interest premium
thought to be drven by rsk factors not ncorporated n ths analyss. The
nvestment demand equaton for regon
j
then takes the form
ε
j
r
j
e
r
j
ε
j
r
j
e
r
j
I
j
= δ
j
K
j
+I
j
= δ
j
K
j
+ β
j
K
j
= K
j
δ
j
+ β
j
(1)
where
K
j
is the (exogenous) base year installed capital stock,
δ
j
s the regonal
depreciation rate,
β
j
s a postve constant and
ε
j
s a postve elastcty.
Critically, investment in any region responds positively to changes that are
expected to rase the sectoral average of a regon's margnal product of
physcal captal and hence the regonal average return on nstalled captal.
10
Other things being equal, improvements in trans-sectoral efficiency, such
as might stem from a trade reform, are thought to raise capital returns
permanently and hence they rase
r
j
e
. If such a shock also causes the rate
of unemployment to fall, this raises total labour use and hence the current
return on installed physical capital. When the shock is a trade reform,
such employment effects are also consdered permanent and so they add
positively to the expected future return on installed capital,
r
j
e
.
Investment decsons are assumed to be made by forward-lookng agents
with access to a long-run version of the model. Thus, the expected change
in the (long run) rate of return on installed capital in each region,
r
j
e
, is
exogenous in short-run simulations. It is calculated by first simulating the
effects of the same shock but under long-run closure assumptons. These
dffer from the short-run closure n the followng ways: there are no nomnal
rgdtes (no rgdty of nomnal wages); larger producton and consumpton
elasticities are used to reflect the additional time for adjustment; physical
capital is no longer sector-specific, it redistributes across sectors to equalise
rates of return; capital controls are ignored; and in China, irrespective of
short-run fiscal policy assumptions, in the long run any loss of government
revenue assocated wth tarff changes s assumed not to be made up va
direct (income) tax, with the result that the fiscal deficit expands,so that
the ratos of government revenue and expendture to GDP are endogenous
whle the average drect tax rate s exogenous.
Note that the short run, comparative-static analysis does not require
that the global economy be in a steady state. When shocks are imposed,
