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Trade Costs, Innovation, and the Gains from Trade

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  • Jeff Thurk

    (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 dierentiation 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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  • Jeff Thurk, 2012. "Trade Costs, Innovation, and the Gains from Trade," 2012 Meeting Papers 141, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:141
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