A Model of World Supply, Demand, and Trade in Differentiated Products

Abstract

The paper develops a two-country model of trade in differentiated products and contrasts the determinants of, and inter-relationships between, trade and competitiveness in the short run (when wage rates and the exchange rate are fixed), the intermediate run (when wages and the exchange rate are flexible, but the number of firms is fixed), and the long run (when all variables can adjust). The two-country general-equilibrium model yields predictions that differ considerably from those obtained from comparable small-country models and describes how and why the relationship between the trade balance and competitiveness might vary over time.

JEL Classification: 4312, 4313