ECO 384G - Business Cycles & Policy

Krugman, P. (1980). Scale economies, product differentiation, and the pattern of trade. The American Economic Review, 70(5), 950. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/scale-economies-product-differentiation-pattern/docview/233048123/se-2

Abstract: Recently, there has been considerable skepticism about the ability of comparative cost theory to explain the actual pattern of international trade. Many people have concluded that a new framework for analyzing trade is needed. The main elements of this new framework being discussed are: 1. economies of scale, 2. the possibility of product competition, and 3. imperfect competition. A simple formal analysis is presented which incorporates these new elements. It can shed light on some issues which cannot be handled in more conventional models. These include the causes of trade between economies with similar factor endowments and the role of a large domestic market in encouraging exports. The basic model is presented in which there are economies of scale in production and firms can costlessly differentiate their products. This model is extended to examine the effect of transportation costs and to deal with ''home market'' effects on trade patterns

Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695-1725. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/impact-trade-on-intra-industry-reallocations/docview/203879433/se-2

Abstract: This paper develops a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. The paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.

Hopenhayn, H. A. (1992). Entry, Exit, and Firm Dynamics in Long Run Equilibrium. Econometrica (1986-1998), 60(5), 1127. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/entry-exit-firm-dynamics-long-run-equilibrium/docview/214868952/se-2

Abstract: This paper develops and analyzes a dynamic stochastic model for a competitive industry which endogenously determines processes for entry and exit and for individual firms' output and employment. The concept of stationary equilibrium is introduced, extending long run industry equilibrium theory to account for entry, exit, and heterogeneity in the size and growth rate of firms. Conditions under which there will be entry and exit in the stationary equilibrium are given. Cross-sectional properties--across size and age cohorts--are analyzed and compared to the data. Implications for the equilibrium distributions of profits and the value of firms are analyzed. The effect of changes in the parameters describing the technological and market conditions of the industry on the equilibrium size distribution and turnover rates are also analyzed.

Melitz, M., and S. Redding. "Heterogeneous Firms and Trade." Handbook of International Economics, 4th ed, 4: 1-54. Elsevier, 4, 1-54. Link

Abstract: This paper develops a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. It then shows how further increases in the industry's exposure to trade lead to additional inter-firm reallocations towards more productive firms. The paper also shows how the aggregate industry productivity growth generated by the reallocations contributes to a welfare gain, thus highlighting a benefit from trade that has not been examined theoretically before. The paper adapts Hopenhayn's (1992a) dynamic industry model to monopolistic competition in a general equilibrium setting. In so doing, the paper provides an extension of Krugman's (1980) trade model that incorporates firm level productivity differences. Firms with different productivity levels coexist in an industry because each firm faces initial uncertainty concerning its productivity before making an irreversible investment to enter the industry. Entry into the export market is also costly, but the firm's decision to export occurs after it gains knowledge of its productivity.

Bernard, A. B., Eaton, J., J, B. J., & Kortum, S. (2003). Plants and productivity in international trade. The American Economic Review, 93(4), 1268-1290. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/abiglobal/scholarly-journals/plants-productivity-international-trade/docview/233024169/sem-2?accountid=7118

Abstract: We reconcile trade theory with plant-level export behavior, extending the Ricardian model to accommodate many countries, geographic barriers, and imperfect competition. The model captures qualitatively basic facts about US plants: (i) productivity dispersion, (ii) higher productivity among exporters, (iii) the small fraction who export, (iv) the small fraction earned from exports among exporting plants, and (v) the size advantage of exporters. Fitting the model to bilateral trade among the United States and 46 major trade partners, we examine the impact of globalization and dollar appreciation on productivity, plant entry and exit, and labor turnover in US manufacturing.

Eaton, J., Kortum, S., & Kramarz, F. (2011). An anatomy of international trade: Evidence from french firms. Econometrica, 79(5), 1453. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/anatomy-international-trade-evidence-french-firms/docview/894731972/se-2

Abstract: We examine the sales of French manufacturing firms in 113 destinations, including France itself. Several regularities stand out: (i) the number of French firms selling to a market, relative to French market share, increases systematically with market size; (ii) sales distributions are similar across markets of very different size and extent of French participation; (iii) average sales in France rise systematically with selling to less popular markets and to more markets. We adopt a model of firm heterogeneity and export participation which we estimate to match moments of the French data using the method of simulated moments. The results imply that over half the variation across firms in market entry can be attributed to a single dimension of underlying firm heterogeneity: efficiency. Conditional on entry, underlying efficiency accounts for much less of the variation in sales in any given market. We use our results to simulate the effects of a 10 percent counterfactual decline in bilateral trade barriers on French firms. While total French sales rise by around $16 billion (U.S.), sales by the top decile of firms rise by nearly $23 billion (U.S.). Every lower decile experiences a drop in sales, due to selling less at home or exiting altogether.

Chaney, T. (2008). Distorted gravity: The intensive and extensive margins of international trade. The American Economic Review, 98(4), 1707-1721. doi: https://doi.org/10.1257/aer.98.4.1707

Abstract- By considering a model with identical firms, Krugman (1980) predicts that a higher elasticity of substitution between goods magnifies the impact of trade barriers on trade flows. In this paper, I introduce firm heterogeneity in a simple model of international trade. I prove that the extensive margin and the intensive margin are affected by the elasticity of substitution in exact opposite directions. When the distribution of productivity across firms is Pareto, the predictions of the Krugman model with representative firms are overturned: the impact of trade barriers on trade flows is dampened by the elasticity of substitution, and not magnified.

Arkolakis, C. (2010). Market penetration costs and the new consumers margin in international trade. The Journal of Political Economy, 118(6), 1151. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/abiglobal/scholarly-journals/market-penetration-costs-new-consumers-margin/docview/858938796/sem-2?accountid=7118

Abstract: This paper develops a novel theory of marketing costs within a trade model with product differentiation and heterogeneity in firm productivities. A firm enters a market if it is profitable to incur the marginal cost to reach a single consumer. It then faces an increasing marginal penetration cost to access additional consumers. The model, therefore, can reconcile the observed positive relationship between entry and market size with the existence of many small exporters in each exporting market. Comparative statics of trade liberalization predict a large increase in trade for goods with positive but low volumes of previous trade.

Bernard, A. B., Jensen, J. B., Redding, S. J., & Schott, P. K. (2007). Firms in international trade. The Journal of Economic Perspectives, 21(3), 3-130. doi: https://doi.org/10.1257/jep.21.3.105   

Abstract: Since the mid-1990s, researchers have used micro datasets to study countries' production and trade at the firm level and have found that exporting firms differ substantially from firms that solely serve the domestic market. Across a wide range of countries and industries, exporting firms have been shown to be larger, more productive, more skill- and capital-intensive, and to pay higher wages than nonexporting firms. These differences exist even before exporting begins and have important consequences for evaluating the gains from trade and their distribution across factors of production. The new empirical research challenges traditional models of international trade and, as a result, the focus of the international trade field has shifted from countries and industries towards firms and products. Recently available transaction-level U.S. trade data reveal new stylized facts about firms' participation in international markets, and recent theories of international trade incorporating the behavior of heterogenous firms have made substantial progress in explaining patterns of trade and productivity growth. 

Melitz, M. J., & Ottaviano, G. I. P. (2008). Market size, trade, and productivity. The Review of Economic Studies, 75(1), 295. Retrieved from http://ezproxy.lib.utexas.edu/login?url=https://www.proquest.com/scholarly-journals/market-size-trade-productivity/docview/204350976/se-2

Abstract: We develop a monopolistically competitive model of trade with firm heterogeneity - in terms of productivity differences - and endogenous differences in the "toughness" of competition across markets - in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.