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Heterogeneous Productivity and the Gains from Trade and FDI

  • Ehsan Choudhri

    ()

  • Antonio Marasco

Nontraded goods account for a major share of GDP in most economies, but have not been incorporated in the welfare analysis of monopolistic-competition models with heterogeneous productivity. This paper extends Helpman, Melitz and Yeaple (American Economic Review 94(1):300–316, 2004 ) to explore welfare effects in the presence of a nontraded good. We derive new analytical results about how the gains from trade and FDI are determined and affected by key parameters in the case of symmetric countries. The model is calibrated to a country group that includes all major developed countries. The gains from openness (trade and FDI) are found to be substantial (between 3.24 and 6.27 per cent of income) even if nontraded goods represent a major part of the economy. Most of these gains are attributed to trade rather than FDI. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11079-012-9243-7
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 2 (April)
Pages: 339-360

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Handle: RePEc:kap:openec:v:24:y:2013:i:2:p:339-360
DOI: 10.1007/s11079-012-9243-7
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Order Information: Web: http://www.springer.com/economics/international+economics/journal/11079/PS2

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  1. Daniel Trefler, 2001. "The Long and Short of the Canada-U.S. Free Trade Agreement," NBER Working Papers 8293, National Bureau of Economic Research, Inc.
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  14. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
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