Capital Intensity and Welfare: National and International Determinants

Why do some countries and regions have higher capital intensity than others? This question is at the heart of economic development analysis since capital intensity, per capita incomes and welfare are closely linked. We develop a two sector general equilibrium model relevant to small open economies that import capital goods and produce export goods priced in world markets. This model is used to derive a taxonomy of factors that lead to differing capital intensities across countries. Aggregate capital intensity is a function of multi-factor productivity (MFP) in the traded goods sector (but not in the non-traded sector), the capital share parameter for each sector, the cost of capital and the terms of trade. Total output and consumer utility are affected by the same variables and also by MFP in the non-traded sector.