Working Paper: CEPR ID: DP4964
Authors: Giancarlo Corsetti; Philippe Martin; Paolo Pesenti
Abstract: This paper analyses the welfare implications of international spillovers related to productivity gains, changes in market size, or government spending. We introduce trade costs and endogenous varieties in a two-country general-equilibrium model with monopolistic competition, drawing a distinction between productivity gains that enhance manufacturing efficiency, and gains that lower the cost of firms? entry and product differentiation. Our model suggests that countries with lower manufacturing costs have higher GDP but supply a smaller number of goods at a lower international price. Countries with lower entry and differentiation costs also have higher GDP, but supply a larger array of goods at improved terms of trade. The sign of the international welfare spillovers depends on terms of trade, but also on consumers? taste for variety. Higher domestic demand has macroeconomic implications that are similar to those of a reduction in firms? entry costs.
Keywords: Productivity; Taste for Variety; Terms of Trade; Trade
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity gains in manufacturing (O49) | Deterioration of terms of trade (F14) |
| Increased efficiency (D61) | Reduction in incentive for firms to introduce new varieties (L15) |
| Higher domestic demand (R22) | Enhancement of welfare (D60) |
| Lower entry costs for firms (L11) | Increase in the number of varieties (O39) |
| Lower entry costs for firms (L11) | Improvement in terms of trade (F14) |
| Productivity improvements (O49) | Changes in global market structure (F61) |
| Productivity gains (O49) | Changes in trade volumes (F19) |
| Productivity gains (O49) | Changes in real exchange rate (F31) |
| Market size changes (D49) | Number of varieties produced (D20) |