PRODUCTIVITY IMPROVEMENTS AND FALLING TRADE COSTS: BOON OR BANE?* |
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| Authors: | Svetlana Demidova |
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| Institution: | 1. McMaster University, Canada;2. I am grateful to Kala Krishna for invaluable guidance and constant encouragement. I also would like to thank two anonymous referees, Pol Antras, Richard Baldwin, Ivan Cherkashin, Robert Feenstra, Mark Melitz, Andres Rodriguez‐Clare, Dani Rodrik, Alexander Tarasov, Jim Tybout, Kei‐Mu Yi, seminar and conference participants at the Wednesday Lunch Seminars at the Pennsylvania State University, 2005 Midwest International Economics meeting, Econometric Society World Congress 2005, and European Trade Study Group 2005 Dublin conference for helpful comments and discussions. All remaining errors are mine. Please address correspondence to: S. Demidova, Department of Economics, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4M4, Canada. Phone: 905‐525‐9140, ext. 26095. Fax: 905‐521‐8232. E‐mail: . |
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| Abstract: | This article looks at two features of globalization, namely, productivity improvements and falling trade costs, and explores their effect on welfare in a monopolistic competition model with heterogenous firms and technological asymmetries. Contrary to received wisdom, and for reasons different from adverse terms of trade effects, it is shown that improvements in a partner's productivity must hurt us. Moreover, falling trade costs can raise welfare in the technologically advanced country while reducing it in the backward one, if technological asymmetries are large enough. |
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