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The impact of trade on aggregate productivity and welfare with heterogeneous firms and business cycle uncertainty

By Jang Ping Thia

Abstract

This paper presents a model with monopolistic competition, productively heterogeneous firms, and business cycle aggregate shocks. With firm-specific productive heterogeneity, weaker firms quit when faced with a negative aggregate shock. Consequently, trade does not always increase firm-level aggregate productivity as negative shocks on the home market can be compensated for by positive shocks elsewhere. Weaker firms, which would otherwise quit in autarky, can continue to operate by exporting. Despite this, trade can still improve welfare for the risk-averse consumer by reducing aggregate price fluctuations

Topics: HC Economic History and Conditions, HD Industries. Land use. Labor, HN Social history and conditions. Social problems. Social reform
Publisher: Taylor & Francis
Year: 2011
DOI identifier: 10.1080/09638190903486090
OAI identifier: oai:eprints.lse.ac.uk:38582
Provided by: LSE Research Online
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