Terms of trade volatility, exports, and GDP

This paper relates terms of trade volatility to exports and output in a two-sector model where entrepreneurs can produce non-tradable goods or pay a fixed cost in order to export. In order to compensate exporters for the fixed entry cost, the expected return to exporting must exceed the expected return to non-tradable production. As a result, exporters are more risk-exposed and trade volatility decreases entry into the export sector. However, terms of trade insurance and hedging strategies can increase exports, GDP, and welfare.