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Productivity Growth, Bounded Marginal Utility, and Patterns of Trade

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  • Philip Sauré

Abstract

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.

Suggested Citation

  • Philip Sauré, 2007. "Productivity Growth, Bounded Marginal Utility, and Patterns of Trade," Economics Working Papers ECO2007/56, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2007/56
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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, April.
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    Cited by:

    1. Harald Fadinger & Pablo Fleiss, 2011. "Trade and Sectoral Productivity," Economic Journal, Royal Economic Society, vol. 121(555), pages 958-989, September.

    More about this item

    Keywords

    Trade Volume; Source Country;

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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