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A Dynamic Model of Trade with Heterogeneous Firms

  • Peter Arendorf Bache

    ()

    (Department of Economics and Business, Aarhus University, Denmark)

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    This paper builds a dynamic general equilibrium trade model, in which heterogeneous intermediate goods are produced and traded in a Melitz (2003) type sector. These intermediate goods are used in the production of a final good, which can be used for consumption, capital accumulation, or investment in market entry. Therefore capital accumulation is the direct alternative to investing in firm entry. This has a number of implications. First, in the short run following trade liberalizations a higher interest rate will prevail, which will tend to shelter incumbent firms from increased competition by discouraging investment in entry of new firms. Second, different forms of trade liberalizations with the same impact on the share of expenditure on domestic variety will have different effects on consumption, and thus welfare, both during transitions and in steady-state, due to different effects on aggregate investment. Third, the accumulation of capital will add a time dimension to the anti-variety effects of trade liberalizations. In effect, capital accumulation generates rich adjustment dynamics both in the aggregate and at the firm level. Further, the study of transitions in this framework provides important insights regarding the effects of different forms of trade liberalizations in general and on welfare and individual firms in particular.

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    File URL: ftp://ftp.econ.au.dk/afn/wp/12/wp12_03.pdf
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    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2012-03.

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    Length: 38
    Date of creation: 04 Jan 2012
    Date of revision:
    Handle: RePEc:aah:aarhec:2012-03
    Contact details of provider: Web page: http://www.econ.au.dk/afn/

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    1. Trimborn, Timo & Koch, Karl-Josef & Steger, Thomas M., 2008. "Multidimensional Transitional Dynamics: A Simple Numerical Procedure," Macroeconomic Dynamics, Cambridge University Press, vol. 12(03), pages 301-319, June.
    2. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
    3. George Alessandria & Horag Choi, 2011. "Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization," Working Papers 11-19, Federal Reserve Bank of Philadelphia.
    4. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, firm dynamics, and international trade," NBER Working Papers 13326, National Bureau of Economic Research, Inc.
    5. Francis Kramarz & Jonathan Eaton & Samuel Kortum, 2005. "An Anatomy of International Trade: Evidence from French Firms," 2005 Meeting Papers 197, Society for Economic Dynamics.
    6. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
    7. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
    8. Richard E. Baldwin & Frédéric Robert-Nicoud, 2006. "Trade and Growth with Heterogenous Firms," NBER Working Papers 12326, National Bureau of Economic Research, Inc.
    9. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc.
    10. Luis A. Rivera-Batiz & Paul M. Romer, 1990. "Economic Integration and Endogenous Growth," NBER Working Papers 3528, National Bureau of Economic Research, Inc.
    11. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
    12. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
    13. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
    14. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
    15. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
    16. Ariel Burstein & Marc J. Melitz, 2011. "Trade Liberalization and Firm Dynamics," NBER Working Papers 16960, National Bureau of Economic Research, Inc.
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