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Varieties and the terms of trade

  • Free Huizinga


  • S. Smulders

This paper analyzes the dynamic adjustment of the terms of trade in an intertemporal, two country model with endogenous product variety. In the base model, all workers are identical. In an extended version, the development of new varieties requires skilled labor while manufacturing uses skilled and unskilled labor. In the model without skill, a population increase in one of the countries has no effect on its terms of trade, not even in the short run. In the model with skill, the terms of trade initially worsen, but eventually return to their original level. The terms of trade immediately and permanently worsen in response to a productivity increase in manufacturing. However, they gradually improve if the productivity in variety research rises. If productivity in both activities rises equiproportionally, the terms of trade respond in the same manner as after a population shock.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 127.

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Date of creation: Jul 2009
Date of revision:
Handle: RePEc:cpb:discus:127
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  1. Pietro Peretto & Sjak Smulders, 2002. "Technological Distance, Growth And Scale Effects," Economic Journal, Royal Economic Society, vol. 112(481), pages 603-624, July.
  2. Lutz Arnold, 2007. "A generalized multi-country endogenous growth model," International Economics and Economic Policy, Springer, vol. 4(1), pages 61-100, April.
  3. Jérôme Vandenbussche & Philippe Aghion & Costas Meghir, 2006. "Growth, distance to frontier and composition of human capital," Journal of Economic Growth, Springer, vol. 11(2), pages 97-127, June.
  4. Aghion, Philippe & Meghir, Costas & Vandenbussche, Jérôme, 2005. "Growth, Distance to Frontier and Composition of Human Capital," CEPR Discussion Papers 4860, C.E.P.R. Discussion Papers.
  5. Gagnon Joseph E, 2008. "Growth-Led Exports: Implications for the Cross-Country Effects of Shocks to Potential Output," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-30, January.
  6. Acemoglu, Daron & Ventura, Jaume, 2001. "The World Income Distribution," CEPR Discussion Papers 2973, C.E.P.R. Discussion Papers.
  7. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
  8. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2007. "Productivity, terms of trade and the 'home market effect'," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00176911, HAL.
  9. Henk Kranendonk & Johan Verbruggen, 2007. "SAFFIER; a multi-purpose model of the Dutch economy for short-term and medium-term analyses," CPB Document 144, CPB Netherlands Bureau for Economic Policy Analysis.
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