Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods
AbstractThis paper analyzes the effects of increasing trade integration on individual utility when the international specialization pattern is stochastic, i.e. when the range of goods each country produces depends on the realization of a random variable. Using a Ricardian continuum of goods model it is shown that under uncertainty a trade-off emerges. As in the standard deterministic model, higher trade integration reduces prices and increases expected real income. However, higher trade integration, reducing the number of active sectors in the economy, also increases the displacement cost the worker suffers when the sector she is employed into has to close down because, ex-post, the foreign country's competing sector results to be more efficient. Two are the main results of the model. First, it is shown that, under uncertainty and job specificity, increasing trade integration is not always welfare enhancing. Second, there exists an optimal level of protection that is higher the smaller the price reduction induced by trade integration and the more technologically similar are countries.
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Bibliographic InfoArticle provided by Elsevier in its journal Structural Change and Economic Dynamics.
Volume (Year): 19 (2008)
Issue (Month): 4 (December)
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Web page: http://www.elsevier.com/locate/inca/525148
Uncertainty Trade integration Optimal protection Specialization Continuum of goods;
Other versions of this item:
- Michele Di Maio, 2006. "Uncertainty, Trade Integration and the Optimal Level of Protection in a Ricardian Model with a Continuum of Goods," Working Papers 34-2006, Macerata University, Department of Finance and Economic Sciences, revised Nov 2008.
- Di Maio, Michele, 2006. "Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods," MPRA Paper 4645, University Library of Munich, Germany.
- F19 - International Economics - - Trade - - - Other
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