Productivity Spillovers, Terms of Trade and the 'Home Market Effect'

Paolo Pesenti, Philippe Martin and Giancarlo Corsetti

No 4964, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the welfare implications of international spillovers related to productivity gains, changes in market size, or government spending. We introduce trade costs and endogenous varieties in a two-country general-equilibrium model with monopolistic competition, drawing a distinction between productivity gains that enhance manufacturing efficiency, and gains that lower the cost of firms? entry and product differentiation. Our model suggests that countries with lower manufacturing costs have higher GDP but supply a smaller number of goods at a lower international price. Countries with lower entry and differentiation costs also have higher GDP, but supply a larger array of goods at improved terms of trade. The sign of the international welfare spillovers depends on terms of trade, but also on consumers? taste for variety. Higher domestic demand has macroeconomic implications that are similar to those of a reduction in firms? entry costs.

Keywords: Trade; Productivity; Terms of trade; Taste for variety (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-eff and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Productivity spillovers, terms of trade, and the "home market effect" (2005)
Working Paper: Productivity Spillovers, Terms of Trade and the 'Home Market Effect' (2005)
Working Paper: Productivity Spillovers, Terms of Trade and the 'Home Market Effect' (2005)
Working Paper: Productivity Spillovers, Terms of Trade and the "Home Market Effect" (2005)
Working Paper: Productivity Spillovers, Terms of Trade and the 'Home Market Effect' (2005)
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