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Productive capacity, product varieties, and the elasticities approach to the trade balance

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  • Joseph E. Gagnon

Abstract

Most macroeconomic models imply that faster output growth tends to lower a country's trade balance by raising its imports with little change to its exports. Krugman (1989) proposed a model in which countries grow by producing new varieties of goods. In his model, faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of U.S. imports from different source countries and finds strong support for Krugman's model.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 781.

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Date of creation: 2003
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Handle: RePEc:fip:fedgif:781

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Keywords: International trade ; Productivity ; Production (Economic theory);

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  17. Prema-chandra Athukorala & J. Reidel, 1993. "Export Growth and Terms of Trade: The Case of the Curious Elasticities," Working Papers 1993.22, School of Economics, La Trobe University.
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  22. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers 164, International Monetary Fund.
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