Working Paper: NBER ID: w11165
Authors: Giancarlo Corsetti; Philippe Martin; Paolo Pesenti
Abstract: This paper analyzes 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 Spillovers; Terms of Trade; Home Market Effect
JEL Codes: F41; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity gains that enhance manufacturing efficiency (L23) | higher GDP (E20) |
| Productivity gains that enhance manufacturing efficiency (L23) | smaller number of goods supplied at lower international prices (F16) |
| Increased efficiency (D61) | smaller number of goods supplied (D41) |
| Productivity gains that lower costs of firm entry and product differentiation (L11) | larger array of goods supplied (H49) |
| Reduced entry costs (D49) | improved terms of trade (F14) |
| productivity gains (O49) | international welfare spillovers (F55) |
| Higher domestic demand (R22) | macroeconomic implications akin to reduced firm entry costs (E69) |
| Trade liberalization that reduces cross-border trade costs (F13) | benefits consumers through lower prices and higher real incomes (F61) |
| Trade liberalization that reduces cross-border trade costs (F13) | lower array of goods available to consumers (D11) |
| Higher manufacturing productivity (L23) | deterioration in terms of trade (F14) |