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The Impact of Trade on Aggregate Productivity and Welfare with Heterogeneous Firms and Business Cycle Uncertainty

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  • Jang Ping Thia
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    Abstract

    This paper presents a model with monopolistic competition, productively heterogeneous firms, and business cycle aggregate shocks. With firm-specific productive heterogeneity, weaker firms quit when faced with a negative aggregate shock. Consequently, trade does not always increase firm-level aggregate productivity as negative shocks on the home market can be compensated for by positive shocks elsewhere. Weaker firms, which would otherwise quit in autarky, can continue to operate by exporting. Despite this, trade can still improve welfare for risk-averse consumers by reducing aggregate price fluctuations.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0883.

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    Date of creation: Jul 2008
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    Handle: RePEc:cep:cepdps:dp0883

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    Keywords: Firm Heterogeneity; Globalisation; Business Cycles;

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    15. Batra, Raveendra N & Russell, William R, 1974. "Gains from Trade Under Uncertainty," American Economic Review, American Economic Association, vol. 64(6), pages 1040-48, December.
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    17. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    18. Bejan, Maria, 2006. "Trade Openness and Output Volatility," MPRA Paper 2759, University Library of Munich, Germany.
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