Working Paper: NBER ID: w12326
Authors: Richard E. Baldwin; Frdric Robert-Nicoud
Abstract: This paper explores the impact of trade on growth when firms are heterogeneous. We find that greater openness produces anti-and pro-growth effects. The Melitz-model selection effects raises the expected cost of introducing a new variety and this tends to slow the rate of new-variety introduction and hence growth. The pro-growth effect stems from the impact that freer trade has on the marginal cost of innovating. The balance of the two effects is ambiguous with the sign depending upon the exact nature of the innovation technology and its connection to international trade in goods and ideas. We consider five special cases (these include the Grossman-Helpman, the Coe-Helpman and Rivera-Batiz-Romer models) two of which suggest that trade harms growth; the others predicting the opposite.
Keywords: trade; 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 |
|---|---|
| trade openness (F43) | anti-growth effect (O40) |
| trade openness (F43) | pro-growth effect (O49) |
| Melitz model's selection effects (F12) | increased expected cost of introducing new varieties (L15) |
| increased expected cost of introducing new varieties (L15) | slower rate of new variety introduction (L15) |
| slower rate of new variety introduction (L15) | decrease in growth (O40) |
| freer trade (F19) | enhanced innovation efficiency (O36) |
| freer trade (F19) | pro-growth effect (O49) |
| trade openness (F43) | ambiguous net effect on growth (O40) |