An Overlapping-Generations Model of International Trade with a Durable Consumption Good

Abstract

We construct a simple overlapping-generations model of international trade with a durable consumption good. We show that the dynamics of the market is described by a nonlinear second-order difference equation; there exists a unique autarkic stationary equilibrium; and it is locally conditionally stable. Further we show that there exists a homothetic fictitious social utility function that characterizes the stationary equilibrium as a “tangent point” of an indifference curve and the production possibility frontier. With this, even in the presence of the consumption durability, we can easily show the basic predictions on trade patterns due to some well-known static trade models such as the Heckscher-Ohlin-Samuelson model and the specific-factors model remain valid at the stationary equilibrium. In addition, we show that a country with a higher rate of time preference tends to have the comparative advantage on the durable good.