Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods
AbstractThis paper analyzes how increasing trade integration affects individual utility when the international specialization pattern is stochastic, i.e. when the number of varieties each country produces depends on the realization of a random variable. I employ a Ricardian continuum of goods model to show that in this case a trade off emerges. As in the standard 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 would suffer in a bad state (i.e. 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). The main result of the model is that there exists an optimal level of protection that it is higher the smaller the price reduction induced by trade integration and the more technologically similar are countries.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 4645.
Date of creation: 2006
Date of revision:
Uncertainty; optimal protection; Ricardian model with a continuum of goods;
Other versions of this item:
- Di Maio, Michele, 2008. "Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods," Structural Change and Economic Dynamics, Elsevier, vol. 19(4), pages 315-329, December.
- 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.
- F19 - International Economics - - Trade - - - Other
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