17 May 2007Working Paper Summaries

The Price of Capital: Evidence from Trade Data

by Laura Alfaro and Faisal Z. Ahmed

Is the price of capital higher across different countries? Motivated by the fact that most countries import the bulk of machinery and equipment, Alfaro and Ahmed used an alternative trade data to capture differences in the price of capital goods across countries. On this basis they found evidence that capital goods are more expensive in poor countries. Key concepts include:

Findings were consistent with conventional wisdom: The price and cost of capital in poor countries is high.
Given that most countries import the bulk of their machinery equipment from a small number of industrialized countries, investment distortions might be a factor in the observed differences in physical capital intensity across countries.
Higher prices might inhibit the diffusion of technologies from rich to poor countries.

Author Abstract

In this paper we use highly disaggregated data on trade in capital goods to study differences in the price of capital across countries. Our strategy is motivated by the fact that most countries import the bulk of machinery equipment (from a small number of industrialized countries). We find the price of imported capital goods to be negatively and significantly correlated with the income of the importing country. Because most low-income countries import the bulk of capital goods, our results provide suggestive evidence that capital goods are more expensive in poor countries, consistent with the conventional explanation regarding the low real investment rates in poor countries.