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Innovation and the Elasticity of Trade Volumes to Tariff Reductions

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  • Rubini, Loris

Abstract

I study the implications of endogenous productivity choices ("innovation") on the effects of trade liberalization. I find that a model with innovation generates an elasticity of trade volumes to tariff reductions that is fifty percent larger than models without innovation, and consistent in magnitude to empirical estimates. To show this, I develop a new model of international trade with innovation, and calibrate it to data on Canada and the United States before the Free Trade Agreement. Feeding into the calibrated model the tariff drop that resulted from the agreement, the increase in the trade volumes is similar to that observed in the data. Without innovation, the change in trade volumes is considerably lower, and similar in magnitude to what existing models without innovation have found.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21484.

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Date of creation: 17 Dec 2009
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Handle: RePEc:pra:mprapa:21484

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Keywords: innovation; trade liberalization; trade elasticity; international trade;

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Cited by:
  1. Diego Restuccia & Richard Rogerson, 2012. "Misallocation and Productivity," Working Papers tecipa-468, University of Toronto, Department of Economics.
  2. Leal Ordóñez, Julio C., 2010. "Informal sector, productivity, and tax collection," MPRA Paper 26058, University Library of Munich, Germany, revised Oct 2010.
  3. Loris Rubini & Klaus Desmet & Facundo Piguillem & Aranzazu Crespo, . "Breaking down the barriers to firmgrowth in Europe The fourth EFIGE policy report," Blueprints, Bruegel, number 744, 02.
  4. Bhattacharya, Dhritiman & Guner, Nezih & Ventura, Gustavo, 2011. "Distortions, Endogenous Managerial Skills and Productivity Differences," IZA Discussion Papers 5963, Institute for the Study of Labor (IZA).
  5. Facundo Piguillem & Loris Rubini, 2013. "Barriers to Firm Growth in Open Economies," EIEF Working Papers Series 1304, Einaudi Institute for Economic and Finance (EIEF), revised Mar 2013.
  6. Diego Restuccia, 2011. "Recent developments in economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 329-357.

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