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The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity: A Comment

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  • Baldwin, Richard
  • Robert-Nicoud, Frédéric

Abstract

Melitz (2003) demonstrates that greater trade openness raises industry productivity via a selection effect and via a production re-allocation effect. Our comment points out that the set-up assumed in the Melitz model displays a trade off between static and dynamic efficiency gains. That is, although freer trade improves industry productivity in a level sense, it harms it in a growth sense. To make this point as simply as possible, we introduce a slight modification to the model that endogenises the growth rate of industry productivity and we show that liberalization slows growth.

Suggested Citation

  • Baldwin, Richard & Robert-Nicoud, Frédéric, 2004. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity: A Comment," CEPR Discussion Papers 4634, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4634
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    References listed on IDEAS

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    1. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms, and Industry Dynamics," Working Paper Series WP03-4, Peterson Institute for International Economics.
    2. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    4. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 635-654.
    5. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    6. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, vol. 78(4), pages 773-785, September.
    7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    8. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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    Cited by:

    1. Baldwin, Richard E. & Robert-Nicoud, Frederic, 2008. "Trade and growth with heterogeneous firms," Journal of International Economics, Elsevier, vol. 74(1), pages 21-34, January.
    2. Mats GRANÉR & Anders ISAKSSON, 2009. "Firm Efficiency And The Destination Of Exports: Evidence From Kenyan Plant‐Level Data," The Developing Economies, Institute of Developing Economies, vol. 47(3), pages 279-306, September.
    3. Hea-Jung Hyun & Yong Joon Jang, 2015. "Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 31, pages 327-357.
    4. Okubo, Toshihiro, 2009. "Trade liberalisation and agglomeration with firm heterogeneity: Forward and backward linkages," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 530-541, September.
    5. Bulent Unel, 2010. "Technology Diffusion through Trade with Heterogeneous Firms," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 465-481, August.

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    More about this item

    Keywords

    Trade liberalization; Endogenous growth; Heterogenous firms; Dynamic versus static efficiency;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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