Journal
JOURNAL OF INTERNATIONAL ECONOMICS
Volume 73, Issue 1, Pages 99-127Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jinteco.2006.08.005
Keywords
trade; productivity; terms of trade; taste for variety
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This paper analyzes the international transmission and welfare implications of productivity gains and changes in market size when macroeconomic adjustment occurs both along the intensive margin of trade (changes in the relative price of existing varieties of tradable goods) and the extensive margin (creation and destruction of varieties). We draw a distinction between productivity gains that enhance manufacturing efficiency and gains that lower the cost of firms' entry and of product differentiation. Countries with lower manufacturing costs have higher GDP but supply their products at lower international prices. Instead, countries with lower entry costs supply a larger array of goods at improved terms of trade. Output growth driven by demographic expansions, as well as government spending, is associated with an improvement in international relative prices and firms' entry. While trade liberalization may result in a smaller array of goods available to consumers, efficiency gains from deeper economic integration benefit consumers via lower goods prices. The international transmission mechanism and the welfare spillovers vary under different asset market structures, depending on trade costs, the elasticity of labor supply, and consumers' taste for varieties. (c) 2007 Elsevier B.V. All rights reserved.
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