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Product Quality, R&D Investment, and International Trade

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  • Jeff Thurk

    (University of Notre Dame)

  • Antoine Gervais

    (University of Notre Dame)

Abstract

We ask whether incorporating product quality differentiation has real effects on trade flows and welfare. We develop and calibrate a multi-country, general equilibrium model of international trade that includes endogenous product quality differentiation amongst heterogeneous firms. Separable transportation and ad valorem trade costs as in Hummels and Skiba (2004) creates a mechanism for product quality to have real effects. The model provides a framework to quantify the effects of quality differentiation on trade flows and welfare in response to a trade liberalization. We find that this channel amplifies the effects of trade liberalization on welfare and exports by 46% and 34%, respectively. Roughly 80% of these effects are driven by liberalization of tariffs rather than transport or fixed export costs.

Suggested Citation

  • Jeff Thurk & Antoine Gervais, 2011. "Product Quality, R&D Investment, and International Trade," 2011 Meeting Papers 1335, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1335
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_1335.pdf
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    References listed on IDEAS

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    1. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    2. Antoine Gervais, 2015. "Product quality and firm heterogeneity in international trade," Canadian Journal of Economics, Canadian Economics Association, vol. 48(3), pages 1152-1174, August.
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