Can multi-stage production explain the home bias in trade?

A large empirical literature finds that there is too little international trade, and too much intra-national trade to be rationalized by observed international trade costs such as tariffs and transport costs. The literature uses frameworks in which goods are assumed to be produced in just one stage. This paper investigates whether the multi-stage nature of production helps explain the home bias in trade. The author shows that multi-stage production magnifies the effects of trade costs. He then calibrates a multi-stage production model to the U.S. and Canada. He solves the model with measures of trade costs constructed from data on tariffs, transport costs, and wholesale distribution margins. The model can explain about 3/8 of the Canada border effect; this is three times more than what a calibrated one-stage model can explain. The model also explains a good deal of Canada’s vertical specialization trade. Finally, a reverse engineering exercise suggests that the unknown or unobserved component of trade costs is smaller than observed trade costs.Production (Economic theory) ; Trade

How much of South Korea's growth miracle can be explained by trade policy?

South Korea's growth miracle has been well documented. A large set of institutional and policy reforms in the early 1960s is thought to have contributed to the country's extraordinary performance. In this paper, the authors assess the importance of one key set of policies, the trade policy reforms in Korea, as well as the concurrent GATT tariff reductions. They develop a model of neoclassical growth and trade that highlights two forces by which lower trade barriers can lead to increased per worker GDP: comparative advantage and specialization, and capital accumulation. The authors calibrate the model and simulate the effects of three sets of tariff reductions that occurred between the early 1962 and 1995. Their main finding is that the model can explain up to 32 percent of South Korea's catch-up to the G7 countries in output per worker in the manufacturing sector. The authors find that the effects of the tariff reductions taken together are about twice as large as the sum of each reduction applied individually.Trade ; Tariff ; Economic policy

The effects of a booming economy on the U.S. trade deficit

The robust growth of the U.S. economy between 1996 and 1999 spurred U.S. demand for foreign goods and contributed to a surge in the U.S. trade deficit. An analysis of the effects of the expansion on the trade balance suggests that the economic boom can account for roughly a third of the sharp rise in the merchandise trade deficit during this period.International trade ; Business cycles

Curbing unemployment in Europe: are there lessons from Ireland and the Netherlands?

Since the mid-1980s, unemployment rates in Ireland and the Netherlands have plummeted, while the average rate for the European Union has maintained its longtime high level. Ambitious labor market reforms_including wage moderation and the tightening of unemployment benefits_have helped to bring the Irish and Dutch rates down. Other European countries would benefit from adopting similar reforms, but they are unlikely to see the same dramatic improvement in their unemployment numbers.Unemployment - Netherlands ; Unemployment - Ireland ; Unemployment - Europe ; Economic policy - Europe

A Tale of Two States

Indian states, development

Structural Change in an Open Economy

We develop a tractable, three-sector model to study structural change in an open economy. The model features an endogenous pattern of trade dictated by comparative advantage. We derive an intuitive expression linking sectoral employment shares to sectoral expenditure shares and to sectoral net export shares of total GDP. Changes in productivity and in trade barriers affect expenditure and net export shares, and thus, employment shares, across sectors. We show how these driving forces can generate the "hump" pattern that characterizes the manufacturing employment share as a country develops, even when manufacturing is the sector with the highest productivity growth.structural transformation, international trade, sectoral labor reallocation

Structural change in an open economy

We develop a tractable, three-sector model to study structural change in a two-country world. The model features an endogenous pattern of trade dictated by comparative advantage. We derive an intuitive expression linking sectoral employment shares to sectoral expenditure shares and to sectoral net export shares of total GDP. Changes in productivity and in trade barriers affect expenditure and net export shares, and thus, employment shares, across sectors. We show how these driving forces can generate the "hump" pattern that characterizes the manufacturing employment share as a country develops, even when manufacturing is the sector with the highest productivity growth.

How much of South Korea’s growth miracle can be explained by trade policy?

South Korea’s growth miracle has been well documented. A large set of institutional and policy reforms in the early 1960s is thought to have contributed to the country’s extraordinary performance. In this paper, we assess the importance of one key set of policies, the trade policy reforms in Korea, as well as the concurrent GATT tariff reductions. We develop a model of neoclassical growth and trade that highlights two forces by which lower trade barriers can lead to increased per worker GDP: comparative advantage and specialization, and capital accumulation. We calibrate the model and simulate the effects of three sets of tariff reductions that occurred between the early 1962 and 1995. Our main finding is that the model can explain up to 32 percent of South Korea’s catch-up to the G7 countries in output per worker in the manufacturing sector. We find that the effects of the tariff reductions taken together are about twice as large as the sum of each reduction applied individually.

International trade: why we don’t have more of it

Globalization has led to an enormous increase in international trade. Over the past 40 years, world exports as a share of output have doubled to almost 25 percent of world output. However, despite this enormous increase, economic evidence suggests that significant barriers to international trade still exist. In “International Trade: Why We Don’t Have More of It,” Edith Ostapik and Kei-Mu Yi summarize the latest developments in the measurement of international trade barriers.International trade

A tale of two states: Maharashtra and West Bengal

In this paper the authors study the economic evolution between 1960 and 1995 of two states in India — Maharashtra and West Bengal. In 1960, West Bengal’s per capita income exceeded that of Maharashtra. By 1995, it had fallen to just 69 percent of Maharashtra’s per capita income. The authors employ a "wedge" methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the sources of the divergent economic performances. Their diagnostic analysis reveals that a large part of West Bengal’s development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets. These patterns, together with additional evidence on developments in the labor market, the manufacturing sector, and voting behavior, suggest a systematic worsening of the business environment in manufacturing in West Bengal during this period.India