The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty

Jang Ping Thia

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper presents a model with monopolistic competition, productively heterogeneous firms, and business cycle aggregate shocks. With firm-specific productive heterogeneity, weaker firms quit when faced with a negative aggregate shock. Consequently, trade does not always increase firm-level aggregate productivity as negative shocks on the home market can be compensated for by positive shocks elsewhere. Weaker firms, which would otherwise quit in autarky, can continue to operate by exporting. Despite this, trade can still improve welfare for risk-averse consumers by reducing aggregate price fluctuations.

Keywords: Firm Heterogeneity; Globalisation; Business Cycles (search for similar items in EconPapers)
JEL-codes: F12 F4 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-bec and nep-opm
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