The long-term impact of trade with firm heterogeneity

Guzmán Ourens

Review of World Economics (Weltwirtschaftliches Archiv), 2020, vol. 156, issue 4, No 6, 887-919

Abstract: Abstract This paper explores the welfare effects of openness in a setting with firm heterogeneity and country asymmetry and presents results in terms of the well-known formula from Arkolakis et al. (Am Econ Rev 102(1):94–130, 2012). By allowing agents to save and the economy to grow, new channels for the welfare effects of openness appear, since firm selection affects the value of accumulated savings and the average efficiency of the economy, and therefore its future growth rate. Country asymmetry yields differentiated, and in some cases opposite, results between countries. In line with the empirical literature, net welfare effects in each region depend on countries’ specific conditions and losses may occur. A numerical exercise fits the model to the UK and EU economies to show the magnitude and direction that each effect can take if trade barriers increase between them. It is shown that welfare losses for UK consumers can be greatly underestimated if asymmetries and dynamics are removed from the analysis.

Keywords: Firm heterogeneity; Expanding varieties; Asymmetric countries; Welfare; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F12 F15 O40 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10290-020-00384-0

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