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Product Quality, R&D Investment, and International Trade

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  • Jeff Thurk

    (University of Notre Dame)

  • Antoine Gervais

    (University of Notre Dame)

Abstract

We ask whether incorporating product quality differentiation has real effects on trade flows and welfare. We develop and calibrate a multi-country, general equilibrium model of international trade that includes endogenous product quality differentiation amongst heterogeneous firms. Separable transportation and ad valorem trade costs as in Hummels and Skiba (2004) creates a mechanism for product quality to have real effects. The model provides a framework to quantify the effects of quality differentiation on trade flows and welfare in response to a trade liberalization. We find that this channel amplifies the effects of trade liberalization on welfare and exports by 46% and 34%, respectively. Roughly 80% of these effects are driven by liberalization of tariffs rather than transport or fixed export costs.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1335.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1335

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  1. Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," CESifo Working Paper Series 3356, CESifo Group Munich.
  2. David Hummels & Alexandre Skiba, 2002. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," NBER Working Papers 9023, National Bureau of Economic Research, Inc.
  3. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  4. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  5. Natalia Ramondo, 2006. "Size, Geography, and Multinational Production," 2006 Meeting Papers 472, Society for Economic Dynamics.
  6. Juan Carlos Hallak & Jagadeesh Sivadasan, 2010. "Firms' Exporting Behavior under Quality Constraints," Working Papers 99, Universidad de San Andres, Departamento de Economia, revised Mar 2010.
  7. Maurice Kugler & Eric Verhoogen, 2012. "Prices, Plant Size, and Product Quality," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 307-339.
  8. 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.
  9. repec:cge:warwcg:13 is not listed on IDEAS
  10. Antoine Gervais, 2013. "Product Quality and Firm Heterogeneity in International Trade," Working Papers 13-08, Center for Economic Studies, U.S. Census Bureau.
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