Product Quality, R&D Investment, and International Trade

Jeff Thurk and Antoine Gervais

No 1335, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We ask whether incorporating product quality differentiation has real effects on trade flows and welfare. We develop and calibrate a multi-country, general equilibrium model of international trade that includes endogenous product quality differentiation amongst heterogeneous firms. Separable transportation and ad valorem trade costs as in Hummels and Skiba (2004) creates a mechanism for product quality to have real effects. The model provides a framework to quantify the effects of quality differentiation on trade flows and welfare in response to a trade liberalization. We find that this channel amplifies the effects of trade liberalization on welfare and exports by 46% and 34%, respectively. Roughly 80% of these effects are driven by liberalization of tariffs rather than transport or fixed export costs.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1335

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