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Trade growth in a heterogeneous firm model: Evidence from South Eastern Europe

  • d'Artis Kancs

    (London School of Economics and Catholic University of Leuven)

In 2007 a Free Trade Area (BFTA) will be created in the Balkans. In this paper we study the potential impact of BFTA on trade growth in the SEE. Given that welfare impacts associated with trade growth depend on the growth channels, more goods and varieties exported or at higher price or higher volume of goods and varieties are exported, in this paper we investigate the structure of integration-induced export growth in the Balkans. The empirical implementation of our analysis is complicated by the fact that firm-level trade data is not available for the SEE economies. In order to cope with this data paucity, we adopt a heterogeneous firm framework, which allows us to decompose the aggregate trade growth in two parts: the intensive margin of trade and the extensive margin of trade using only aggregate trade data. The empirical findings of our study suggest that the BFTA would primarily trigger trade growth through a growing number of exported goods (the extensive margin of trade).Thus, the actual welfare gains from trade growth in the Balkans might be larger than predicted by previous trade studies. We also found that a variable trade cost reduction would lead to higher export growth rates compared to a fixed trade cost reduction. These results allow us to draw detailed policy conclusions.

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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 07-09.

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Length: 37 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:aee:wpaper:0709
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  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  2. Paul R. Bergin & Reuven Glick, 2005. "Tradability, Productivity, and Understanding International Economic Integration," NBER Working Papers 11637, National Bureau of Economic Research, Inc.
  3. 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.
  4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  5. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, 09.
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  9. Head, Keith & Mayer, Thierry, 2004. "The empirics of agglomeration and trade," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 59, pages 2609-2669 Elsevier.
  10. Hillberry, Russell & Hummels, David, 2008. "Trade responses to geographic frictions: A decomposition using micro-data," European Economic Review, Elsevier, vol. 52(3), pages 527-550, April.
  11. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  12. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  13. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
  14. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(1), pages 105-123, March.
  15. Timothy J. Kehoe & Kim J. Ruhl, 2006. "How Important is the New Goods Margin in International Trade?," 2006 Meeting Papers 733, Society for Economic Dynamics.
  16. Peter Egger, . "A Note on the Proper Econometric Specification of the Gravity Equation," WIFO Working Papers 108, WIFO.
  17. Vasily Astrov, 2001. "Structure of Trade in Manufactured Products Between Southeast European Countries and the European Union," wiiw Balkan Observatory Working Papers 14, The Vienna Institute for International Economic Studies, wiiw.
  18. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
  19. Hillberry, Russell H. & McDaniel, Christine A., 2002. "A Decomposition of North American Trade Growth since NAFTA," Working Papers 15866, United States International Trade Commission, Office of Economics.
  20. 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.
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