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Tradability, Productivity, and Understanding International Economic Integration

38 Pages Posted: 23 Nov 2005  

Paul R. Bergin

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

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Date Written: September 2005

Abstract

This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin, price dispersion has not decreased and may even have increased. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers overall price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.

Suggested Citation

Bergin, Paul R. and Glick, Reuven, Tradability, Productivity, and Understanding International Economic Integration (September 2005). NBER Working Paper No. w11637. Available at SSRN: https://ssrn.com/abstract=812011

Paul R. Bergin (Contact Author)

University of California, Davis - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

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United States
415-974-3184 (Phone)
415-974-2168 (Fax)

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