Working Paper: NBER ID: w10718
Authors: Richard E. Baldwin; Frédéric Robert-Nicoud
Abstract: Melitz (2003) demonstrates that greater trade openness raises industry productivity via a selection effect and via a production re-allocation effect. Our comment points out that the set-up assumed in the Melitz model displays a trade off between static and dynamic efficiency gains. That is, although freer trade improves industry productivity in a level sense, it harms it in a growth sense. To make this point as simply as possible, we introduce a slight modification to the model that endogenises the growth rate of industry productivity and we show that liberalisation slows growth.
Keywords: trade liberalisation; endogenous growth; heterogeneous firms; dynamic versus static efficiency
JEL Codes: H32; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater trade openness (F19) | industry productivity (O49) |
| greater trade openness (F19) | growth (O40) |
| greater trade openness (F19) | selection and reallocation effects (D61) |
| trade openness (F43) | productivity (O49) |
| trade openness (F43) | sectoral productivity (O49) |
| modified model (C59) | correlation between openness and sectoral productivity (O49) |