Institutions Trade & Economic Development
The correlation between trade and income has been extensively documented in empirical research. But the ‘endogeneity issue’ of whether trade increases income or income increases trade has not received a definite answer. The first attempts to solve the endogeneity issue involved the use of geographical instruments. A natural choice of instrument is the geographical distance from one […]
In static trade models with no market imperfections, the aggregate income and welfare of a small country grow when it opens to trade. In endogenous growth models, trade liberalization boosts the growth effect generated by non-diminishing returns to factors of production, or learning-by-doing, or knowledge spillovers, or other forms of endogenous technological change. Although important insights […]
A well-known prediction in the “new” trade theory is that markups fall with trade liberalization. The reason is that, because larger firms and/or more concentrated industries enjoy more market power, their prices are more responsive to an increase in foreign competition. There are efficiency gains and consumers benefit from cheaper domestically produced and imported goods. However, micro-econometric studies […]
Trade policies, price shocks, and changes in exchange rates have a distributional impact whenever they affect the relative price of goods that are consumed at different intensities by high and low-income households. Low-income households consume relatively more tradeables (such as food), while high-income households consume relatively more non-tradeables (such as personal services). If trade policy, for example, causes an increase on the price […]
Standard theory predicts that, in the long term, trade liberalization leads to an increase in allocative efficiency and hence an increase of fiscal revenues. This prediction is based on the idea that overall economic surplus determines the size of the tax base and an improvement in allocative efficiency increases surplus. Given this attractive feature of […]
In international trade theory, the Stolper-Samuelson theorem demonstrates how changes in relative goods prices affect the returns to factors of production. The theorem predicts that a rise in the relative price of a good will lead to an increase in the real return of the factors used intensively in its production. The resulting redistribution of […]
In international trade models, the assumption of homothetic preferences ensures that income elasticities of demand are equal to one, allowing the analysis to focus on the supply side. Over the years, many important insights have been facilitated by this assumption. These include the idea that differing factor proportions can motivate trade, as well as more […]
A large literature has developed over the last twenty years or so to understand the role of firm heterogeneity in a country’s exporting behavior. A key feature of the models in this literature is that they typically assume each firm has measure zero in its industry. This assumption is useful because it removes strategic interaction […]
It has long been recognized that the dynamic effects of trade, such as the learning externalities that drive technological change, are likely to dwarf the static gains. According to the oral tradition in economics, the literature tended to focus on the static gains because the dynamic effects were poorly understood and supposedly impossible to measure. […]
The quality of contracting institutions is among the most important determinants of the relationship between buyers and sellers engaged in international trade. Contractual frictions are magnified in international trade by the fact that if one of the parties reneges on a written contract the dispute has to be resolved in local courts (as opposed to […]