Working Paper: CEPR ID: DP4622
Authors: Andrew B. Bernard; Stephen Redding; Peter K. Schott
Abstract: This Paper presents a model of international trade that features heterogeneous firms, relative endowment differences across countries, and consumer taste for variety. The Paper demonstrates that firm reactions to trade liberalization generate endogenous Ricardian productivity responses at the industry level that magnify countries? comparative advantage. Focusing on the wide range of firm-level reactions to falling trade costs, the model also shows that, as trade costs fall, firms in comparative advantage industries are more likely to export, that relative firm size and the relative number of firms increases more in comparative advantage industries and that job turnover is higher in comparative advantage industries than in comparative disadvantage industries.
Keywords: Entry and Exit; Heckscher-Ohlin; Interindustry Trade; International Trade; Trade Costs
JEL Codes: F11; F12; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduced trade costs (F19) | Increased export likelihood (F10) |
| Increased export likelihood (F10) | Increased relative firm size (L25) |
| Increased export likelihood (F10) | Increased number of firms in comparative advantage industries (F12) |
| Trade liberalization (F13) | Higher job turnover in comparative advantage industries (J63) |
| Trade liberalization (F13) | Endogenous Ricardian productivity responses at the industry level (O49) |
| Endogenous Ricardian productivity responses (O49) | Magnified comparative advantage (F12) |