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Contents Introduction

In this paper, we show that the existing models and descriptions of the transfer of capital between countries that are provided in international economics are inadequate because they fail to explain the causes of, or the consequences of, persistent trade imbalances and because the assumption that there is a world interest rate, r* at which all countries can theoretically lend or borrow is extremely misleading. Instead, we argue that a more fruitful modeling approach is to regard the world as consisting of a number of regions, each of which has a particular rate of return on capital, which is a function of the local marginal product of capital (MPK). We demonstrate that such a modeling approach can provide some additional insights into who gains and loses from persistent trade deficits and how this might be affected by the Trump Administration’s tariff policy.