Productivity Improvements and Falling Trade Costs: Boon or Bane?

Abstract

This paper looks at two features of globalization, namely productivity improvements and falling trade costs, and explores their effect on welfare in a monopolistic competition model with heterogeneous firms and technological asymmetries. Contrary to received wisdom, and for reasons unrelated to adverse terms of trade effects, we show that there is good reason to expect improvements in a partner's productivity to hurt us. Moreover, falling trade costs can raise welfare in the technologically advanced country while reducing it in the backward one if it is backward enough.