Trade Liberalization and Firm Dynamics

51 Pages Posted: 18 Apr 2011 Last revised: 7 May 2022

See all articles by Ariel T. Burstein

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2011

Abstract

In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, sunk export costs, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.

Suggested Citation

Burstein, Ariel T. and Melitz, Marc J. and Melitz, Marc J., Trade Liberalization and Firm Dynamics (April 2011). NBER Working Paper No. w16960, Available at SSRN: https://ssrn.com/abstract=1810314

Ariel T. Burstein (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Marc J. Melitz

Centre for Economic Policy Research (CEPR)

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Harvard University - Department of Economics ( email )

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