National Bureau of Economic Research, Cambridge, MA, US Center for Economic Policy Research, London, UK. Pennsylvania State University, University Park, PA, USA National Bureau of Economic Research, Cambridge, MA, USA.
INTERNATIONAL TRADE
The changes are fourfold: (a) new questions have arisen as the world trade and payments system has evolved; (b) new datasets have become available; (c) new theoretical models have been designed to address new issues, but have also enabled sharper and deeper analysis of older issues; and (d) new empirical studies have greatly enriched our understanding of the global economy. Trade is covered in the first six chapters and international macroeconomics in the next six chapters.
PREFACE*
INTERNATIONAL MACROECONOMICS
One of the fundamental questions investigated in international macroeconomics is the relationship between exchange rates and other macroeconomic variables. This important question and the research therein is the subject of the chapter by Heathcote and Perri entitled "Assessing International Efficiency".
Heterogeneous Firms and Trade ∗
INTRODUCTION
More generally, theories of firm heterogeneity and trade have improved our understanding of the mechanisms through which an economy responds to trade. Section 3 introduces a general theoretical framework for modeling firm heterogeneity in differentiated product markets. Section 4 characterizes the model's closed economy equilibrium, while Section 5 examines the implications of openness to trade.
EMPIRICAL EVIDENCE
In Pavcnik (2002), one third of the increase in total productivity following Chilean trade liberalization is attributed to productivity increases within factories. For example, the basic version of the model assumes constant mark-ups, thus abstracting from the pro-competitive effects of trade liberalization, although we relax this assumption in a later section.
GENERAL SETUP
- Technology
- Firm Behavior
- Firm Performance Measures and Productivity
- Firm Entry and Exit
Of course, the model is an abstraction and does not capture all the features of the data. 4 For another review of the theoretical literature on firm heterogeneity and trade, see Redding (2011), while Bernard et al.
CLOSED ECONOMY EQUILIBRIUM
- Sectoral Equilibrium
- General Equilibrium
We will also show that given the same input supply Land ExpenditureX for the sector, the hypothetical equilibrium with representative firms would also exhibit the same amount of active firms as in our current structure with heterogeneous firms. In fact, a one-sector version of our model would yield the same sector aggregate variables and firm averages (for the firm with productivityϕ˜) as Krugman's (1980) model, where all firms share the same level of productivity given by ϕ˜. The main difference with our heterogeneous model of firms.
OPEN ECONOMY WITH TRADE COSTS
- Firm Behavior
- Firm Market Entry and Exit
- Mass of Firms and Price Index
- Welfare
- Multilateral Trade Liberalization
- Asymmetric Trade Liberalization
So we see that the average firm revenue in the open economy will be higher than the closed economy. As in the closed economy, differences in country size will be reflected in the mass of entrants into a country.
QUANTITATIVE PREDICTIONS
- Pareto Distribution
- Gravity
- Wages and Welfare
- Structural Estimation
Firms can enter this market without incurring trade costs and benefit from lower variable trade costs for imports in the liberalizing country (see for example Krugman, 1980; Venables, 1987). Given this distributional assumption, we see that average firm exports are independent of variable trade costs, so that higher variable trade costs reduce bilateral trade only through the extensive mass margin of exporting firms.
FACTOR ABUNDANCE AND HETEROGENEITY
In addition to the standard Stolper-Samuelson effects of trade liberalization, the actual reward of each factor is affected by changes in product variety (as in Helpman and Krugman, 1985) and increases with average productivity in each sector. Burstein and Vogel (unpublished a) and Harrigan and Reshef (2011) examine the complementarity between heterogeneous firm productivity and skill intensity, and how this influences the impact of trade liberalization on wage inequality. Burstein and Vogel (unpublished b) provide general conditions under which changes in factor trade are a sufficient condition for changes in relative factor prices.
TRADE AND MARKET SIZE
As in the CES preferences model in Section 3, more productive firms (with lower c) have lower prices (pi(c)), higher output and income (ri(c)), and higher profits. high (πi(c)). This is no longer the case in the long run, as the number of firms in each country adjusts.
ENDOGENOUS FIRM PRODUCTIVITY
- Product Scope Decision and Multi-Product Firms
- Innovation
- Dynamics
We discuss the introduction of firm dynamics in the next section, but first sketch a static version of the innovation intensity decision used by Atkeson and Burstein (2010). As in the static version of the model, the sunk nature of the entry cost.
FACTOR MARKETS
Differences in labor market institutions across countries and industries provide a source of comparative advantage and shape the impact of trade liberalization on aggregate unemployment.50 Reducing a country's labor market frictions in a differentiated sector increases its own welfare by increasing the size of the differentiated sector. and lowering its differentiated sector price index. This expansion in a differentiated sector in one country strengthens the export market competition faced by firms in another country's differentiated sector. Conversely, proportional reductions in labor market frictions in the differentiated sector in both countries raise welfare in each country by increasing the size of the differentiated sector in each country.
CONCLUSION
2011) emphasize the role of the increases in average industry productivity induced by trade liberalization in a heterogeneous firm model in reducing effective search costs. More generally, firms are complex organisms, and there is still room for further research into firm boundaries and the determinants of the products, stages of production, and workers included within a firm's boundaries. Despite some work on dynamics, much of the literature on firm heterogeneity and trade remains static, and we have relatively little understanding of the processes through which large and successful firms emerge and the implications of these processes for the transitional dynamics of the economy's response. for trade liberalization.
Multinational Firms and the Structure of International Trade ∗
STYLIZED FACTS
Let ASds be the sales of the affiliates located in the country that are owned by parents in the country. The Census collects a large amount of information about the structure of the operations of US-based businesses. We now make a similar comparison of the activities of foreign subsidiaries with other companies in their host country. Table 2.1 shows the share of economic activity (rows) of foreign subsidiaries in their host country (columns) in the manufacturing industry for a number of OECD countries.
BENCHMARK MODEL: AN EXTENDED KRUGMAN (1980) MODEL In this section, we describe the framework that we will build on to navigate through the
Furthermore, for developed countries cross-border mergers and acquisitions accounted for 68% of FDI flows, while for developing countries the number was only 18%. Fact Six: Cross-border mergers and acquisitions account for a large proportion of FDI and are a particularly important mode of entry into developed countries. Regarding the marginal cost parameter ϕ, we will consider the case in which it is also common across firms within an industry, as in Krugman (1980), as well as the case in which it differs between firms within an industry, as in Melitz (2003) ).
THE PROXIMITY-CONCENTRATION HYPOTHESIS
- Homogeneous Firms
- Firm Heterogeneity
- Greenfield FDI versus Mergers and Acquisitions
The most important novelty in relation to the analogous condition (8) in the symmetric case is the fact that the trade-off now also depends on the ratio of the Home and Foreign wages. Furthermore, the relative wageH/wF increases in the relative sizeLH/LF of the home country, and converges to τ(σ−1)/σ when LH/LF → ∞(this is not proved in Krugman, 1980, but we do in the Online Appendix). Finally, Ci is a vector of country controls that includes a variable GDP/POPi, which is the logarithm of the absolute difference in GDP per worker in the United States and in countries.
VERTICAL EXPANSION
- A Factor-Proportions Model of Vertical FDI
- Vertical FDI and Wage Inequality
- Vertical FDI and Firm Heterogeneity
- Vertical FDI: Empirical Evidence
1980) or Feenstra and Hanson (1996), in such a case there exists a marginal stadia∗ such that the country with relatively high skills (call it Home) specializes in the production of stadia > s∗, while the country with many unskilled labour. call it foreign) specializes in the phases ≤s∗ and the production of the homogeneous good z. In the latter case, the head office must incur additional fixed costs, which are described below. Second, the list of countries heavily involved in hosting affiliates exporting back to the United States shows great variation in the level of their development. The top five countries in US order of size
MULTICOUNTRY MODELS
- Locations as Substitutes
- Locations as Complements
Here we discuss how the insights of the Eaton and Kortum model have been applied with increasing sophistication to the analysis of trade and multinational production in a multi-country environment. Assume that the production of varieties of the differentiated good can be fragmented into two stages. The first is the intermediate good stage that requires one unit of labor to produce one unit of a firm-specific intermediate. The second stage is assembly which can only be done in H and F.
MULTINATIONAL FIRM BOUNDARIES
- Transaction-Cost Approaches
- The Property-Rights Approach
- Empirical Evidence
The ownership theory of the firm has featured prominently in the international business literature in recent years, starting with the work of Antràs (2003). Bureau of Customs and Border Protection, and has more specifically examined the determinants of variation in the share of intrafirm imports in the total United States. These cross-border specifications have also revealed a robust positive effect of institutional quality on the share of intrafirm-U.S.
CONCLUSION
An empirical assessment of the proximity-concentration trade-off between multinational sales and trade. Ownership and Control in Outsourcing in China: Assessing the Firm's Property Rights Theory. Complex strategies of the integration of multinational companies and interstate dependence in the structure of foreign direct investment.
Gravity Equations: Workhorse,Toolkit, and Cookbook ∗
Gravity Features of Trade Data
The first important feature of trade data that reflects the equation of physical gravity is that exports increase in proportion to the economic size of the destination and imports increase in proportion to the size of the economy of origin. The horizontal axes of both figures show the GDP (based on market exchange rates) of the EU trading partner. 2Trade data comes from the International Monetary Fund (IMF) Direction of Trade Statistics (DOTS) and GDPs come from World Development Indicators (WDI). The web attachment provides more information on sources of gravity data.
A Brief History of Gravity in Trade
An irony of the history of the gravity equation is that trade economists "discovered" the empirical importance of geographic distance and national border just as some prominent journalists and consultants had dismissed these factors as anachronisms. The "fusion" of the two literatures meant changes in the way the gravity equations should be evaluated and in the way the estimated coefficients should be interpreted. It was also a sign of the growing intellectual stature of the gravity equation that three 2008 papers show that their heterogeneous firm models are compatible with gravity.
MICRO-FOUNDATIONS FOR GRAVITY EQUATIONS
- Three Definitions of the Gravity Equation
- Assumptions Underlying Structural Gravity
- Main Variants of Gravity for Trade
- Gravity Models Beyond Trade in Goods
We conclude with Section 5, which covers areas of current, largely unresolved research and progress:. limits of the gravitational equations before I conclude. estimated by regressing log exports on exporter and importer fixed effects and a vector of bilateral trade cost variables. The importer's total expenditure, Xn, can be thought of as a "pie" to be allocated. The share of the pie allocated to country i is denoted by πni. Instead, it allows for "constant elasticity of transformation" (CET). The idea is that production for one destination cannot be transformed without cost into production for another destination.
THEORY-CONSISTENT ESTIMATION
- Proxies for Multilateral Resistance Terms
- Iterative Structural Estimation
- Fixed Effects Estimation
- Ratio-Type Estimation
- Other Methods
- Monte Carlo Study of Alternative Estimators
- Identification and Estimation of Country-Specific Effects
A related issue is that constructing S requires knowledge of the trade cost elasticity, which is also included in φni to be estimated by (23). DDM is one of the worst estimators when there are a large number of non-random missing observations. Its estimates are not robust to missing data and it is highly imprecise, as seen in the high standard deviation of the coefficients.
GRAVITY ESTIMATES OF POLICY IMPACTS
- Meta-Analysis of Policy Dummies
- The Elasticity of Trade with Respect to Trade Costs
- Partial vs General Equilibrium Impacts on Trade
- Testing Structural Gravity
In the last part of the paper, Frankel (2010) uses the conversion of the French franc to the euro in 1999 as an exogenous shock that hit West African countries that had the CFA franc (pegged to the French franc) as their currency. 2. The exponential of the coefficient is our estimator of the impact of the trade cost change. Notes: MTI, GETI and welfare are the median values of the real/counterfactual trade ratio for countries relevant in the experiment.
FRONTIERS OF GRAVITY RESEARCH
- Gravity’s Errors
It shows two versions of the Armington CES model, with and without an external cargo. However, we defer treatment of the null issue to the next section in order to focus on the role of assumptions about the error term. Both Poisson and Gamma PML give consistent estimatesζ regardless of the distribution of ηni as long as E[Xni | zni] = exp(zniζ).
