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

34 Pages Posted: 27 Jul 2005

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; 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)

Paolo A. Pesenti

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

Multiple version iconThere are 3 versions of this paper

Date Written: March 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 that enhance manufacturing efficiency, and gains that lower the cost of firms' entry and 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 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: F32, F41

Suggested Citation

Corsetti, Giancarlo and Martin, Philippe and Pesenti, Paolo A., Productivity Spillovers, Terms of Trade and the 'Home Market Effect' (March 2005). CEPR Discussion Paper No. 4964. Available at SSRN: https://ssrn.com/abstract=771485

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
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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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75007 Paris
France
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paolo A. Pesenti

Federal Reserve Bank of New York ( email )

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212-720-5493 (Phone)
212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

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