PRODUCTIVITY IMPROVEMENTS AND FALLING TRADE COSTS: BOON OR BANE?

Svetlana Demidova

International Economic Review, 2008, vol. 49, issue 4, 1437-1462

Abstract: This article looks at two features of globalization, namely, productivity improvements and falling trade costs, and explores their effect on welfare in a monopolistic competition model with heterogenous firms and technological asymmetries. Contrary to received wisdom, and for reasons different from adverse terms of trade effects, it is shown that improvements in a partner's productivity must hurt us. Moreover, falling trade costs can raise welfare in the technologically advanced country while reducing it in the backward one, if technological asymmetries are large enough. Copyright © (2008) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2008
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