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

32 Pages Posted: 24 Feb 2005

See all articles by Paolo A. Pesenti

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Giancarlo Corsetti

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2005

Abstract

This paper analyzes 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 from manufacturing efficiency and those related to firms' lower cost of entry or 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 not only 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

JEL Classification: F41, F32

Suggested Citation

Pesenti, Paolo A. and Corsetti, Giancarlo and Martin, Philippe, Productivity Spillovers, Terms of Trade, and the 'Home Market Effect' (February 2005). FRB of New York Staff Report No. 201. Available at SSRN: https://ssrn.com/abstract=671761 or http://dx.doi.org/10.2139/ssrn.671761

Paolo A. Pesenti (Contact Author)

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National Bureau of Economic Research (NBER)

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Giancarlo Corsetti

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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Centre for Economic Policy Research (CEPR)

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Philippe Martin

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

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France
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Centre for Economic Policy Research (CEPR)

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United Kingdom

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