Trade Liberalization with Heterogenous Firms

16 Pages Posted: 17 Nov 2004

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Rikard Forslid

Stockholm University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

Abstract

This Paper details the positive and normative effects of reciprocal trade liberalization when firms have endogenously determined, heterogeneous productivity levels. We show that trade liberalization leads to: (i) an anti-variety effect (the number of varieties consumed drops) in contrast to the well-known Krugman variety effect; and (ii) a Stolper-Samuelson like result on factor rewards. We decompose the welfare impact into four partial effects. Three of these are unique to the model, namely, the Melitz anti-variety effect, the Melitz productivity effect, and the MacDonalization effect. We show that the first effect tends to lower welfare while the other two tend to raise it. Overall, the four effects imply that the representative gains from trade liberalization. If we identify factor ownership with particular classes of consumers, we can say that freer trade implies unambiguous welfare gains for laborers and export-firm owners. Other firm owners gain if and only if spending on manufactured varieties is sufficiently high.

Keywords: Trade liberalization, heterogeneous firms, anti-variety effect, Krugman variety effect

JEL Classification: H32, P16

Suggested Citation

Baldwin, Richard E. and Forslid, Rikard, Trade Liberalization with Heterogenous Firms (September 2004). Available at SSRN: https://ssrn.com/abstract=621548

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Rikard Forslid

Stockholm University ( email )

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Sweden
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+46 8 15 9482 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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