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Intermediate Goods Trade, Technology Choice and Productivity

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Abstract

We develop a dynamic model of intermediate goods trade in which the pattern and the extent of intermediate goods trade are endogenous. We consider a small open economy whose final good production employs an endogenous array of intermediate goods, from low technology (high cost) to high technology (low cost). The underlying intermediate goods technology evolves over time. We allow for endogenous markups and consider the effect of trade policy on both the intensive and extensive margins. We show that either domestic or foreign trade liberalization reduces the range of exports and the range of domestic intermediate goods production. Either type of trade liberalization reduces intermediate producer markups and increases fi nal good output and average productivity, with stronger positive productivity effects for newly imported intermediate inputs. However, domestic trade liberalization results in lower aggregate and average technology for domestic intermediate good producers.

Suggested Citation

  • Shin-Kun Peng & Raymond Riezman & Ping Wang, 2014. "Intermediate Goods Trade, Technology Choice and Productivity," IEAS Working Paper : academic research 14-A003, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:14-a003
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    References listed on IDEAS

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    1. Keller, Wolfgang, 2000. "Do Trade Patterns and Technology Flows Affect Productivity Growth?," World Bank Economic Review, World Bank Group, vol. 14(1), pages 17-47, January.
    2. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
    3. Fernandes, Ana M., 2007. "Trade policy, trade volumes and plant-level productivity in Colombian manufacturing industries," Journal of International Economics, Elsevier, vol. 71(1), pages 52-71, March.
    4. Pedro Cavalcanti Ferreira & JosÈ Luiz Rossi, 2003. "New Evidence from Brazil on Trade Liberalization and Productivity Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1383-1405, November.
    5. Kim, Euysung, 2000. "Trade liberalization and productivity growth in Korean manufacturing industries: price protection, market power, and scale efficiency," Journal of Development Economics, Elsevier, vol. 62(1), pages 55-83, June.
    6. Peng, Shin-Kun & Thisse, Jacques-Francois & Wang, Ping, 2006. "Economic integration and agglomeration in a middle product economy," Journal of Economic Theory, Elsevier, vol. 131(1), pages 1-25, November.
    7. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
    8. Rudiger Dornbusch, 1992. "The Case for Trade Liberalization in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 69-85, Winter.
    9. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-1393, September.
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    Cited by:

    1. Edwards, T. Huw & Perroni, Carlo, 2014. "Market Integration, Wage Concentration, and the Cost and Volume of Traded Machines," CAGE Online Working Paper Series 203, Competitive Advantage in the Global Economy (CAGE).
    2. T.Huw Edwards & Carlo Perroni, 2014. "Market Integration, Wage Concentration, and the Cost and Volume of Traded Machines," Discussion Paper Series 2014_08, Department of Economics, Loughborough University, revised Sep 2014.

    More about this item

    Keywords

    Intermediate Goods Trade; Endogenous Technology Choice; Endogenous Markup; Extensive versus Intensive Margin Effect of Trade liberalization;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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