Financial development, international trade and welfare.

Abstract

Differences between domestic financial systems can lead to international trade. A country with relatively developed or decentralized financial systems will export innovative commodities while a country with less developed and centralized financial systems will export traditional commodities. Trade is always welfare improving before the resolution of uncertainty but the country with the more risk averse financial system and the world as a whole can be worse off with trade after the resolution of uncertainty. A temporary protection can be welfare improving for such risk averse countries which are often the less developed ones.Free trade commitment; Financial systems; Idiosyncratic risk; Risk aversion; Trade losses;