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Product Durability and Trade Volatility

Author

Listed:
  • Dimitra Petropoulou

    (Department of Economics, University of Sussex)

  • Kwok Tong Soo

    (Department of Economics, Lancaster University)

Abstract

One of the main causes behind the trade collapse of 2008-09 was a significant fall in the demand for durable goods. This paper develops a small country, overlapping generations model of international trade in which goods durability gives rise to a more than proportional fall in trade volumes, as observed in 2008-09. The model has three goods - two durable, traded goods and one non-durable, non-traded good and two factors of production. The durability of goods affects consumers’ lifetime wealth and their optimal consumption bundle across goods and time periods. A uniform productivity shock reduces consumers’ lifetime wealth inducing a re-optimisation away from durables. This gives rise to a more than proportional effect on international trade, provided the non-traded sector is sufficiently capital intensive. The elasticity of trade flows to GDP is found to be increasing in both the degree of durability and the size of the shock. Thus the model provides micro-foundations for the asymmetric shock to the demand for durable goods observed in recessions and clarifies the link between this endogenous shift in preferences and international trade flows. It also explains the observation that deeper downturns are associated with a higher elasticity of trade to GDP. Furthermore, the greater the degree of durability of traded goods, the larger is the share of domestically produced goods in consumption, for plausible factor intensities. This provides an alternative explanation for the home bias in consumption, and hence another explanation for Trefler's "missing trade ".

Suggested Citation

  • Dimitra Petropoulou & Kwok Tong Soo, 2011. "Product Durability and Trade Volatility," Working Paper Series 2811, Department of Economics, University of Sussex.
  • Handle: RePEc:sus:susewp:2811
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    References listed on IDEAS

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    1. Kristian Behrens & Gregory Corcos & Giordano Mion, 2013. "Trade Crisis? What Trade Crisis?," The Review of Economics and Statistics, MIT Press, pages 702-709.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Product durability and trade volatility
      by aamighini in NEP-INT blog on 2012-01-24 15:04:14

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    Cited by:

    1. Di Ubaldo, Mattia, 2016. "Firms and trade in downturns," Economics PhD Theses 0416, Department of Economics, University of Sussex.
    2. repec:fip:feddgm:00014 is not listed on IDEAS
    3. Mattia Di Ubaldo, 2015. "Product Cost-Share: a Catalyst of the Trade Collapse," Working Paper Series 8015, Department of Economics, University of Sussex.

    More about this item

    Keywords

    Trade in durable goods; 2008 trade collapse economic growth;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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