Productivity Growth, Bounded Marginal Utility, and Patterns of Trade
AbstractThe workhorse model of the New Trade Theory fails to explain four strong and central patterns of postwar trade data. These patterns are, first, the massive increase in trade volumes, second, the small fraction of traded varieties the average country imports, third the correlation between per capita income growth and trade growth, and fourth, the correlation between trade growth and growth in the number of source countries per imported good. The present paper shows that a small and reasonable change in the demand structure can reconcile the model with the data. It departs from standard theory by assuming that consumers derive bounded marginal utility from varieties. This implies that consumers purchase only the cheaper share of varieties and that expensive foreign varieties bearing high transport costs are not imported. Technological progress which increases per capita consumption of the varieties in the consumption basket decreases marginal utility derived from each of them and induces consumers to extend their consumption to more expensive varieties produced at more distant locations. This additional margin along which trade can expand induces a substantial increase in the trade share as productivity grows. Productivity change is thus identified as a joint determinant of trade shares, the number of source countries per good, and per capita income, explaining the trends and correlations in the data.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2007/56.
Date of creation: 2007
Date of revision:
Contact details of provider:
Postal: Badia Fiesolana, Via dei Roccettini, 9, 50016 San Domenico di Fiesole (FI) Italy
Web page: http://www.eui.eu/ECO/
More information through EDIRC
Trade Volume; Source Country;
Find related papers by JEL classification:
- F1 - International Economics - - Trade
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-INT-2008-01-05 (International Trade)
- NEP-UPT-2008-01-05 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kei-Mu Yi, 2003.
"Can Vertical Specialization Explain the Growth of World Trade?,"
Journal of Political Economy,
University of Chicago Press, vol. 111(1), pages 52-102, February.
- Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
- Alejandro Cunat & Marco Maffezzoli, 2005.
"Can comparative advantage explain the growth of US trade?,"
LSE Research Online Documents on Economics
19919, London School of Economics and Political Science, LSE Library.
- Alejandro Cuñat & Marco Maffezzoli, 2007. "Can Comparative Advantage Explain the Growth of us Trade?," Economic Journal, Royal Economic Society, vol. 117(520), pages 583-602, 04.
- Alejandro Cuñat & Marco Maffezzoli, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEP Discussion Papers dp0669, Centre for Economic Performance, LSE.
- Alejandro Cunat & Marco Maffezzoli, 2003. "Can Comparative Advantage Explain the Growth of US Trade?," Working Papers 241, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Cuñat, Alejandro & Maffezzoli, Marco, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEPR Discussion Papers 5348, C.E.P.R. Discussion Papers.
- Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
- Fadinger, Harald & Fleiss, Pablo, 2008.
"Trade and Sectoral Productivity,"
6938, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcia Gastaldo).
If references are entirely missing, you can add them using this form.