Introduction

This study investigates, from the viewpoint of endogenous real business cycles, the relationship between international specialization and dynamic behavior of multiple countries' economic activities (business cycles) in a two-good, two-factor model in which capital is freely mobile internationally. Among the many areas of international economics to which Professor Ronald Jones has made major contributions are the determination of trade patterns and the international movement of capital. In his early work, Professor Jones investigated world specialization patterns in models in which production factors are internationally immobile (Jones, 1956 and 1961). He then extended his research to the case in which capital is freely mobile internationally. In this setting, he investigated the determinants of capital flows and the roles of tariff and tax policies (Jones, 1967, 1987 and 1989, Jones and Ruffin, 1975, and Jones and Dei, 1983). Through this long sequence of insightful research, Professor Jones has illuminated the critical role that the international movement of capital plays in the determination of a world specialization pattern. We are both graduates of the University of Rochester, the school that Professor Jones has helped to become a center of economic thought, and we are honored to have this opportunity to present our study involving a subject to which he has made such an important contribution.

The relationship between international specialization and international business cycles has long been considered in the context of what may be called the hypothesis of trade destabilization, the proposition that trade destablizes a (small) less-developed country by making the country overly specialized in a small part of the primary sector, thereby subjecting it to the (larger) business cycles of (more developed) large countries.