Trade liberalization, product variety and growth in a small open economy: a quantitative assessment |
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Authors: | Thomas F Rutherford |
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Institution: | a Department of Economics, University of Colorado, Boulder, CO 80309-0256, USA b Mailstop No. MC3-303, The World Bank, 1818 H St., N.W., Washington, DC 20433, USA |
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Abstract: | We develop a numerical growth model that quantifies the welfare effects of trade liberalization. Additional intermediate input varieties provide the engine of growth and dramatically magnify the welfare gains from trade liberalization. In our central model, a 10% tariff cut leads to a 10.6% estimated gain in Hicksian EV. Systematic sensitivity analysis shows that there is virtually no chance of a welfare increase less than 3%, but a 6.6% chance of a welfare gain greater than 18%. We show that complementary reforms are crucial to fully realize the potential gains from the trade reform. |
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Keywords: | Trade liberalization Product variety Growth Computable general equilibrium |
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