Varieties and the terms of trade

Free Huizinga and Sjak Smulders ()

No 127, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: This paper analyzes the dynamic adjustment of the terms of trade in an intertemporal, two country model with endogenous product variety. In the base model, all workers are identical. In an extended version, the development of new varieties requires skilled labor while manufacturing uses skilled and unskilled labor. In the model without skill, a population increase in one of the countries has no effect on its terms of trade, not even in the short run. In the model with skill, the terms of trade initially worsen, but eventually return to their original level. The terms of trade immediately and permanently worsen in response to a productivity increase in manufacturing. However, they gradually improve if the productivity in variety research rises. If productivity in both activities rises equiproportionally, the terms of trade respond in the same manner as after a population shock.

JEL-codes: F12 F41 O31 O41 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-int and nep-opm
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