Creator: Bergoeing, Raphael and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 284 Abstract:
This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized countries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences, emphasized by Markusen (1986), to effect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large effects. We test the model by calibrating it to 1990 data and then “backcasting” to 1961 to see what changes in crucial variables between 1961 and 1990 are predicted by the theory. The results show that, although the model is capable of explaining much of the increased concentration of trade among industrialized countries, it is not capable of explaining the enormous increase in the ratio of trade to income. Our analysis suggests that it is policy changes, rather than the elements emphasized in the new trade theory, that have been the most significant determinants of the increase in trade volume.
Keyword: Nonhomothetic Preferences, Intraindustry Trade, Imperfect Competition, Scale Economics, Trade Growth, and Product Differentiation Subject (JEL): F13 - Trade Policy; International Trade Organizations, F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, and F17 - Trade: Forecasting and Simulation
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 533 Abstract:
We show that a trade model with an exogenous set of heterogeneous firms with fixed operating costs has the same aggregate outcomes as a span-of-control model. Fixed costs in the heterogeneous-firm model are entrepreneurs' forgone wage in the span-of-control model.
Keyword: Span-of-control model, Firm heterogeneity, Income distribution, and International trade Subject (JEL): D31 - Personal Income, Wealth, and Their Distributions, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, and F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Creator: Atkeson, Andrew and Burstein, Ariel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 404 Abstract:
International relative prices across industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in a quantitative model of international trade. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the US, it can reproduce deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure.
Keyword: Terms of trade, Real exchange rate, Purchasing power parity, Exchange-rate pass-through, and Pricing-to-market Subject (JEL): F31 - Foreign Exchange, F14 - Empirical Studies of Trade, and F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Creator: Mercenier, Jean and Schmitt, Nicolas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 188 Abstract:
We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.
Keyword: Sunk costs, Trade liberalization, Market structure, and Applied general equilibrium Subject (JEL): C68 - Computable General Equilibrium Models, F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, F17 - Trade: Forecasting and Simulation, and D58 - Computable and Other Applied General Equilibrium Models