Productivity Growth, Bounded Marginal Utility, and Patterns of Trade
The workhorse model of the New Trade Theory fails to explain four strong and central patterns of postwar trade data. These patterns are, first, the massive increase in trade volumes, second, the small fraction of traded varieties the average country imports, third the correlation between per capita income growth and trade growth, and fourth, the correlation between trade growth and growth in the number of source countries per imported good. The present paper shows that a small and reasonable change in the demand structure can reconcile the model with the data. It departs from standard theory by assuming that consumers derive bounded marginal utility from varieties. This implies that consumers purchase only the cheaper share of varieties and that expensive foreign varieties bearing high transport costs are not imported. Technological progress which increases per capita consumption of the varieties in the consumption basket decreases marginal utility derived from each of them and induces consumers to extend their consumption to more expensive varieties produced at more distant locations. This additional margin along which trade can expand induces a substantial increase in the trade share as productivity grows. Productivity change is thus identified as a joint determinant of trade shares, the number of source countries per good, and per capita income, explaining the trends and correlations in the data.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy|
Web page: http://www.eui.eu/ECO/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kei-Mu Yi, 2003.
"Can Vertical Specialization Explain the Growth of World Trade?,"
Journal of Political Economy,
University of Chicago Press, vol. 111(1), pages 52-102, February.
- Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
- Alejandro Cuñat & Marco Maffezzoli, 2005.
"Can Comparative Advantage Explain the Growth of US Trade?,"
CEP Discussion Papers
dp0669, Centre for Economic Performance, LSE.
- Alejandro Cuñat & Marco Maffezzoli, 2007. "Can Comparative Advantage Explain the Growth of us Trade?," Economic Journal, Royal Economic Society, vol. 117(520), pages 583-602, 04.
- Alejandro Cunat & Marco Maffezzoli, 2005. "Can comparative advantage explain the growth of US trade?," LSE Research Online Documents on Economics 19919, London School of Economics and Political Science, LSE Library.
- Cuñat, Alejandro & Maffezzoli, Marco, 2005. "Can Comparative Advantage Explain the Growth of US Trade?," CEPR Discussion Papers 5348, C.E.P.R. Discussion Papers.
- Alejandro Cunat & Marco Maffezzoli, 2003. "Can Comparative Advantage Explain the Growth of US Trade?," Working Papers 241, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2007/56. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Banks)
If references are entirely missing, you can add them using this form.