“Love of wealth” and economic growth

In a Ramsey–Cass–Koopmans growth framework it is shown that for an optimum a benevolent social planner cannot have an excessive “love of wealth”. With a “right” “love of wealth” an optimum exists and implies higher long‐run per‐capita capital, income, and consumption relative to the standard model. This has important implications for comparative development trajectories. The optimum implies dynamic efficiency with the possibility of getting arbitrarily close to the golden rule where long‐run per‐capita consumption is maximal. It is shown that the optimal path attains its steady state more slowly. Thus, the beneficial effects of love of wealth materialize later than in the standard model. Furthermore, the economy can be decentralized as a competitive private ownership economy. One can then identify “love of wealth” with the “spirit of capitalism.” The paper thus implies that one needs a “right” level of the “spirit of capitalism” to realize any beneficial effects for the long run.     

The effects of foreign shocks when interest rates are at zero

In a two‐country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed‐economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if the neutral rate is low—consistent with “secular stagnation”—and trade openness is high.     

Per Capita Income and the Mystery of Missing Trade

The literature on the Heckscher–Ohlin–Vanek (HOV) model has concentrated on the production side, particularly the unrealistic assumptions of identical techniques and factor price equalization. However, less is known about the demand side. In this paper, we compare the supply side assumptions versus the demand side assumptions as a cause of the empirical failures in the HOV prediction. While the relaxation in the supply side assumptions is crucial to predict the direction of factor trade, the demand side assumptions are shown to play an important role in explaining why factor trade is “missing” in relation to the HOV prediction. For example of the slope test for labor, the supply side repair improves from 0.026 to 0.162, whereas the demand side repair improves significantly from 0.162 to 0.891.     

Economic Determinants of Free Trade Agreements Revisited: Distinguishing Sources of Interdependence

One of the most notable international economic events since 1990 has been the enormous increase in the number of free trade agreements (FTAs). While Baier and Bergstrand were the first to show empirically the impact of a country‐pair's economic characteristics on the likelihood of the pair having an FTA, the literature has been extended to demonstrate the importance empirically of FTA “interdependence”—the effect of other FTAs on the probability of a pair having an FTA. In the context of the Baier–Bergstrand framework, this paper delves deeper into the sources of interdependence—an “own‐FTA” effect and a “cross‐FTA” effect. The authors argue that the own‐FTA effect (the impact on the net welfare gains of an FTA between two countries owing to either already having other FTAs) likely dwarfs the cross‐FTA effect (the impact on the net welfare gains of an FTA between the pair owing to other FTAs existing in the rest of the world, or ROW). Augmenting a parsimonious logit model with simple “multilateral FTA” and “ROW FTA” terms to differentiate the own and cross effects empirically, it is shown that the marginal impact on the probability of a country‐pair having an agreement of either country having one more FTA with a third country is 50 times that of one more FTA between another pair in ROW. The results suggest that “domino (own‐FTA) effects” have far exceeded “competitive liberalization (cross‐FTA) effects” in the proliferation of FTAs.     

ON THE OUTPUT EFFECTS OF BARRIERS TO TRADE*

We study the macroeconomic effects of international trade policy by integrating a Hecksher–Ohlin trade model into an optimal‐growth framework. The model predicts that a more open economy will have higher factor productivity. Furthermore, there is a “selective development trap” to which countries may or may not converge, depending on policy. Income at the development trap falls as trade barriers increase. Hence, cross‐country differences in barriers to trade may help explain the dispersion of per capita income observed across countries. The effects are quantified, and we show that protectionism can explain a relevant fraction of TFP and long‐run income differentials across countries.     

International Trade and Volume Patterns under Quasilinear Preferences

We formally analyze the pattern and volume of trade by embedding quasilinear preferences in the standard perfectly competitive, two‐factor, two‐good, two‐country trade model. Quasilinear preferences deliver a natural partition of the two goods into a luxury and a necessity, and preserve the validity of the Heckscher–Ohlin and Heckscher–Ohlin–Vanek theorems. In addition, the predicted factor content of trade under quasilinear preferences is smaller (larger) than the predicted factor content of trade under homothetic preferences if and only if the luxury good is capital (labor) intensive. This result offers a novel explanation for the “missing‐trade” mystery.     

Public infrastructure and trade in a dynamic two‐country model

We develop a two‐country dynamic trade model with public infrastructure having an “unpaid‐factor”‐type positive externality on private sectors’ productivity. With welfare‐maximizing national governments making infrastructure investment, we show that a country with a smaller labor endowment, a lower depreciation rate of infrastructure, and/or a lower time preference rate will become an exporter of a good that is more dependent on infrastructure and will gain from trade, whereas its trading partner may lose from trade. We consider both the nonstrategic governments case and the case of strategic governments that recognize the effect on the terms of trade.     

International Trade as Determined by Income and Income Distribution

Abstract

In standard trade theory, consumption is normally assumed to be homothetic. Consequently, income and its distribution have no role in determining international trade patterns. This paper examines the assumption and its implications. The assumption of homothetic preferences is rejected at the 1% level. It further demonstrates that the Heckscher–Ohlin–Vanek (HOV) model modified by allowing for non-homothetic taste improves the performance of HOV prediction and explains some of the trade puzzles and paradoxes.     

International Trade and Unemployment—the Worker‐selection Effect

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.     

Vertically Integrated North–South Trade and the Redux Model

The paper uses the framework of Obstfeld and Rogoff's Redux model to study the impact of monetary shocks on exchange rate, terms of trade, and welfare in the context of a North–South trade. The authors show that a relative Northern monetary expansion can depreciate or appreciate its currency depending on whether the consumption elasticity of money demand and the degree of monopolistic distortion are low or high enough. This shock has asymmetric effects on welfare in such a way that “beggar‐thyself” or “beggar‐thy‐neighbor” effects always occur.     

ON THE INFORMATIONAL CONTENT OF WAGE OFFERS*

This article investigates signaling and screening roles of wage offers in a single‐play matching model with two‐sided unobservable characteristics. It generates the following predictions as matching equilibrium outcomes: (i) “good” jobs offer premia if “high‐quality” worker population is large; (ii) “bad” jobs pay compensating differentials if the proportion of “good” jobs to “low‐quality” workers is large; (iii) all firms may offer a pooling wage in markets dominated by “high‐quality” workers and firms; or (iv) Gresham's Law prevails: “good” types withdraw if “bad” types dominate the population. The screening/signaling motive thus has the potential of explaining a variety of wage patterns.     

Do Patent Rights Regimes Matter?

The paper asks whether exports are affected by importers’ patent rights regimes using a gravity trade equation. US export data to 71 countries from 1970 to 1992 are used. A two‐way random‐effects panel indicates that patent rights regimes per se do not matter; they matter with importing countries’ imitative abilities. For a country with an “average” imitative ability, US R&D‐intensive exports increase by 4–9% for a unit increase in the patent rights index; a unit increase in the patent rights index leads to a drop in US non‐R&D‐intensive exports by about 8–11%.     

Skill distribution and income disparity in a North‐South trade model

Abstract. What are the impacts of free trade agreement on the welfare of different types of workers in a developed country? What is the impact of free trade on a developed country's income disparity? What is the effect of free trade on the skill distribution of a developed country? The objective of this paper is to address the above questions in a two‐sector general‐equilibrium North‐South trade model in which both countries produce one final good and one high‐tech intermediate input. The final good is produced with the use of a high‐tech intermediate input and unskilled workers. Horizontally differentiated skilled workers produce the high‐tech intermediate input. Each country is populated by a continuum of unskilled workers with differential potential ability. Workers in the North and South can acquire skills by investment in training or education. Thus, skill distribution in the North and South is determined endogenously in the model through a self‐selection process. I characterize two different types of equilibria: a closed‐economy equilibrium without trade and a free trade equilibrium. Then, I investigate the impact of free trade, in the presence of training costs, on the skill distribution within each country, income disparity, and social welfare. JEL classification: D63, F10, J31     

TRANSPORTATION COSTS,AGRICULTURAL PRODUCTIVITY,AND CROSS‐COUNTRY INCOME DIFFERENCES*

I study the role of transportation for development by introducing regional trade and a transportation sector into the standard two‐sector model of agriculture–nonagriculture. Low transport productivity can distort the allocation of resources across geographically dispersed production units within sectors and between agriculture and nonagriculture. I infer cross‐country transport productivity disparities from observed domestic transport costs and transport infrastructure stocks. “Endowing” rich countries with the transport productivity of poor countries would reduce their income by 10%. Combining transport productivity disparities with disparities in nonagricultural productivity and arable land the model yields a 50% higher rich–poor income ratio than the two‐sector model.     

The Trade Effects of Indian Antidumping Actions

Antidumping (AD) has emerged as the most widespread policy impediment to trade in the last 25 years. One of the surprise proliferators of AD in the lesser developed world has been India, which has filed an outstanding number of 285 cases between 1992 and 2002. In this paper, I study empirically the effect of Indian AD cases on trade flows from other countries. I also look at the effect of AD cases on trade diversion from countries subject to or “named” in AD investigations to non‐subject or “non‐named” countries and conclude that Indian AD policy is effective. I use a unique dataset combining AD data from the World Trade Organization with trade data from Comtrade. The empirical model is estimated via the Arellano–Bond procedure.     

The Empirics of Comparative Advantage: Overcoming the Tyranny of Nonrefutability

I assess the empirical evidence on comparative advantage. I argue that the Heckscher–Ohlin–Vanek (HOV) relationship is not a refutable general‐equilibrium proposition. Consequently, the empirical Heckscher–Ohlin literature has been suffering from the tyranny of nonrefutability. The trade‐governing principle of comparative advantage, the Ricardo–Haberler–Deardorff (RHD) theorem, yields a refutable general‐equilibrium prediction about the pattern of international trade and allows for a theory‐based assessment of the magnitude of the gains from trade. The recent experimental evidence on Japan's nineteenth‐century opening‐up to world trade provides a strong case for the hypothesis that comparative advantage governed Japan's international trade in its early trading years. The aggregate gains from that trade are estimated to be no larger than 9% of Japan's GDP.     

Stable Tariffs and Retaliations*

A two‐country, two‐commodity model of trade is considered to reformulate the tariff retaliations. It is known that tariff retaliations lead to a Nash‐equilibrium, a non‐free‐trade outcome. However, the negotiation process underlying the Nash equilibrium does not capture the notion of retaliation properly. We use the “contingent threat situation” to reformulate tariff retaliations. In this context, we show that the free trade is a stable outcome. More surprisingly, this interesting result is also valid for the “Johnson case,” where one country is better off under the tariff‐ridden Nash equilibrium compared to free trade.     

Nonhomothetic Preferences and International Trade

This study examines whether nonhomothetic preferences underlie the “missing trade” problem associated with factor content of trade models. We first find that per capita income goes a long way in explaining differences in goods consumption across countries. We then find a striking correlation between the factor content of consumption and per capita income, and show that accounting for this is a key part of resolving the case of the missing trade. However, nonhomothetic preferences over broad categories of expenditure play only a small role in this phenomenon. Rather, we find that as income grows, spending is directed towards the relatively capital‐intensive version of a given good. Since recent research shows that capital intensity is correlated with quality ( Schott, 2004 ), our results suggest that within‐product quality differences are likely important for explaining the factor content of trade, whereas nonhomothetic preferences over broad categories of expenditure are much less so.     

Development-related biases in factor productivities and the HOV model of trade

Abstract .  Past empirical failures of the basic Heckscher-Ohlin-Vanek (HOV) model related to the inability of data to meet its restrictive assumptions. Trefler (1993) tried to resuscitate HOV by introducing a simple Hicks-neutral (HN) factor-productivity adjustment. In this paper, we re-examine this question by estimating factor-specific productivities from the individual technology data of multiple developed and developing countries. We find evidence of factor-augmenting technological differences. Further, the ratios of factor productivities are strongly correlated with corresponding factor endowments. This systematic bias implies that the ability of HOV to explain North-South factor trade depends on both relative factor abundance and factor-augmenting productivity gaps.     

Effects of Multilateral Trade Liberalization on Prices*

To analyze the effects of simultaneous tariff reductions by multiple importing countries on prices, we construct a simple three‐country model where a good is produced by a monopolist with nonconstant marginal cost and imported by two countries. We compare two representative tariff‐reduction formulas: the “fixed‐amount” and the “uniform percentage” reductions. The uniform percentage reductions may increase the consumer price in the importing country, whose initial tariff is lower. Thus, importing countries with relatively low tariffs may prefer a bilateral trade agreement to a multilateral one to ensure consumer gains.