nep-int New Economics Papers
on International Trade
Issue of 2009‒03‒28
eight papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Putting the "New" into New Trade Theory: Paul Krugman's Nobel Memorial Prize in Economics By Neary, J Peter
  2. Price Convergence in the European Union: Within Firms or Composition of Firms? By Isabelle Méjean; Cyrille Schwellnus
  3. In Search of WTO Trade Effects:Preferential Trade Agreements Promote Trade Strongly, But Unevenly By Theo S. Eicher; Christian Henn
  4. Trade, wages and productivity By Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Südekum
  5. Consolidation and Harmonization of Regional Trade Agreements (RTAs): A Path Toward Global Free Trade By Park, Innwon; Park, Soonchan
  6. From Agriculture to Mining: The Impact of Structural Changes in Australian Commodity Exports on the Australian Terms of Trade By Frost, Mark; Parton, Kevin
  7. International Trade and Aggregate Fluctuations in Granular Economies By Julian di Giovanni; Andrei A. Levchenko
  8. The Declining Importance of Tradable Goods Manufacturing in Australia and New Zealand: How Much can Growth Theory Explain? By Ben Hunt

  1. By: Neary, J Peter
    Abstract: This paper reviews the scientific contributions of Paul Krugman to the study of international trade, on the occasion of his receipt of the 2008 Nobel Memorial Prize in Economics. A simplified exposition is presented of some of his principal findings, including: the effects of trade on firm scale and product diversity in a general model of monopolistic competition; the integration of monopolistic competition with factor endowments theory; the implications of transport costs, including home-market effects and the possibility of agglomeration in models of economic geography; and the positive and normative consequences of oligopolistic trade.
    Keywords: economic geography; imperfect competition; intra-industry trade; monopolistic competition; oligopoly and trade; product differentiation
    JEL: F12
    Date: 2009–03
  2. By: Isabelle Méjean (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Cyrille Schwellnus (OECD - Economics Department and CEPII)
    Abstract: In this paper we use data on French export prices at the disaggregated firm and product level to evaluate the effect of economic integration on price convergence. We use the European integration ‘experiment' and firm-level data on export prices to distinguish between two possible margins of adjustment: At the intensive margin economic integration induces different pricing strategies within the firm, whereas at the extensive margin it affects the composition of firms with different pricing strategies. In our sample price convergence is 40 percent faster in the European Union than in an appropriately defined control group. 30 percent of this effect can be attributed to the fact that a higher share of firms with a low propensity to price discriminate serve European markets.
    Keywords: Price convergence, Firm heterogeneity, European integration
    Date: 2009–01
  3. By: Theo S. Eicher; Christian Henn
    Abstract: The literature measuring the impact of Preferential Trade Agreements (PTA) and WTO membership on trade flows has produced remarkably diverse results. Rose's (2004) seminal paper reports a range of specifications that show no WTO effects, but Subramanian and Wei (2007) contend that he does not fully control for multilateral resistance (which could bias WTO estimates). Subramanian and Wei (2007) address multilateral resistance comprehensively to report strong WTO trade effects for industrialized countries but do not account for unobserved bilateral heterogeneity (which could inflate WTO estimates). We unify these two approaches by accounting for both multilateral resistance and unobserved bilateral heterogeneity, while also allowing for individual trade effects of PTAs. WTO effects vanish and remain insignificant throughout once multilateral resistance, unobserved bilateral heterogeneity, and individual PTA effects are introduced. The result is robust to the use of alternative definitions and coding conventions for WTO membership that have been employed by Rose (2004), Tomz et al. (2007), or by Subramanian and Wei's (2007).
    Keywords: World Trade Organization , Bilateral trade agreements , Multilateral trade negotiations , Trade restrictions , Trade models , Cross country analysis ,
    Date: 2009–03–10
  4. By: Kristian Behrens (Department of Economics, Université du Québec à Montréal (UQAM), Canada; CORE, Université catholique de Louvain, Belgium; CIRPÉE, Canada); Giordano Mion (National Bank of Belgium, Research Department; LSE, Department of Geography, London, UK); Yasusada Murata (Advanced Research Institute for the Sciences and Humanities (ARISH), Nihon University, Tokyo, Japan); Jens Südekum (Mercator School of Management, Universität Duisburg-Essen, Germany; Ruhr Graduate School of Economics, Germany; IZA, Germany)
    Abstract: We develop a new general equilibrium model of trade with heterogeneous firms, variable demand elasticities and endogenously determined wages. Trade integration favours wage convergence, boosts competition, and forces the least efficient firms to leave the market, thereby affecting aggregate productivity. Since wage and productivity responses are endogenous, our model is well suited to studying the impact of trade integration on aggregate productivity and factor prices. Using Canada-US interregional trade data, we first estimate a system of theory-based gravity equations under the general equilibrium constraints generated by the model. Doing so allows us to measure 'border effects' and to decompose them into a 'pure' border effect, relative and absolute wage effects, and a selection effect. Using the estimated parameter values, we then quantify the impact of removing the Canada-US border on wages, productivity, mark-ups, the share of exporters, the mass of varieties produced and consumed, and thus welfare. Finally, we provide a similar quantification with respect to regional population changes.
    Keywords: heterogeneous firms; gravity equations; general equilibrium; monopolistic competition; variable demand elasticities
    JEL: F12 F15 F17
    Date: 2009–03
  5. By: Park, Innwon; Park, Soonchan
    Abstract: Some economists worry about the ‘spaghetti bowl phenomenon’ expected from proliferating regional trade agreements (RTAs). In particular, the complicated web of hub-and-spoke type of overlapping free trade agreements (FTAs) can result in high costs for verifying rules of origin (RoO) and trade diversion or suppression effects. This explains why almost half of the RTAs notified to the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) are currently inactive. This research attempts to provide best practices for RTAs to enhance global free trade by mitigating these negative effects. More specifically, we quantitatively estimate the trade creation and diversion effects of harmonized and cumulated RoO (bilateral, diagonal, and full cumulation) for RTAs established under GATT Article XXIV and under the Enabling Clause by adopting a Gravity regression analysis. We find that (i) RTAs in general create trade among members and divert trade from nonmembers; (ii) RTAs should be established under the comprehensive GATT Article XXIV, rather than the piecemeal Enabling Clause; and (iii) full cumulation is the most optimal provision in terms of creating the most intra-bloc trade and diverting the least extra-bloc trade. Overall, we strongly recommend that RTAs should employ full cumulation of RoO under GATT Article XXIV. This strategy will enable regionalism to be compatible with multilateralism, to be sustainable in the long run, and finally to lead us to global free trade.
    Keywords: regional trade agreements; rules of origin; cumulation; gravity; GATT Article XXIV; Enabling Clause
    JEL: F15 F13 C23
    Date: 2009–01–14
  6. By: Frost, Mark; Parton, Kevin
    Abstract: Australia has long been considered a commodity based economy, with the relationship between the terms of trade and the real exchange rate well documented. Less well documented are the determinants of the Australian terms of trade and how these have moved in response to structural change and growing internationalisation of the Australian economy. This paper examines the Australian terms of trade since 1983 and links movements with the increasing internationalisation of the Australian economy and structural changes within the export and import sectors.
    Keywords: terms of trade, trade, commodity prices, Australian economy, resource sector, exchange rates,
    Date: 2009
  7. By: Julian di Giovanni (International Monetary Fund); Andrei A. Levchenko (University of Michigan and International Monetary Fund)
    Abstract: This paper proposes a new channel through which international trade affects macroeconomic volatility. We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large Þrms have an impact on aggregate volatility. Opening to trade increases the importance of large Þrms to the economy, thus raising macroeconomic volatility. We next explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Our simulation exercise shows that the contribution of trade to aggregate ßuctuations depends strongly on country size: in an economy such as the U.S., that accounts for one-third of world GDP, international trade increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some 30% in a small open economy, such as Belgium or Poland. The model performs well in matching the elasticity of macroeconomic volatility with respect to country size observed in cross-country data.
    Keywords: Macroeconomic Volatility, Firm-SpeciÞc Idiosyncratic Shocks, Large Firms, International Trade
    JEL: F12 F15 F41
    Date: 2009–02
  8. By: Ben Hunt
    Abstract: In this paper, the IMF's new Global Economy Model (GEM) is used to estimate the contribution of unbalanced growth to the decline in the share of goods production in Australia and New Zealand. The simulation results suggest that faster productivity growth in the tradable goods sector in Australia, New Zealand, and their major trading partners accounts for a significant portion of the relative decline in the importance of goods production. Over the 1995 to 2004 period, unbalanced growth explains more than 80 percent of the decline in goods production in both countries.
    Keywords: Capital goods , Australia , New Zealand , Productivity , Industrial production , Services sector , Economic growth , Economic models , Trade models , Time series , Cross country analysis ,
    Date: 2009–01–28

This nep-int issue is ©2009 by Alessia A. Amighini. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.