Simple Trade Model Research Articles

Gender wage discrimination with employer prejudice and trade openness

This paper studies the effect of trade liberalisation on gender wage inequality. A simple trade model with employer taste-based discrimination and imperfect competition provides an explanation for the heterogeneous effects of international trade on the gender wage gap within sectors. While import competition reduces rents and with them the gender wage gap, the effect of exports depends on the level of concentration of a sector. On the one hand, easier access to foreign markets has a competition effect through the selection of the low-cost firms in non-concentrated sectors. On the other hand, better export opportunities with easier access to foreign markets can increase profits of domestic firms’ in concentrated sectors and thus enable discriminatory firms to maintain wage gaps. Evidence from Uruguay supports the empirical relevance of the taste-based discrimination mechanism at the sector level.

How Should Sanctions Account for Bystander Countries?

Neutral “bystander countries” have profoundly shaped the impact of trade sanctions imposed on Russia following its invasion of Ukraine. How should sanctions account for the presence of such bystanders? I study this question in a simple trade model where a sanctioning country places tariffs on imports from a sanctioned country in the presence of a neutral third country. Optimal tariffs-as-sanctions are lower on goods that the sanctioner can import from bystanders. On goods that the sanctionee can export to bystanders, tariffs-as-sanctions are higher given an elasticity of (excess) supply to the sanctioner but lower given a total elasticity of supply.

The Interactive Impact of Trade Policy Uncertainty and Credit Constraint Heterogeneity on Firms’ Export Margins: Theory and Empirics

Abstract This paper develops a simple trade model of heterogeneous firms, which incorporates the dual heterogeneity of credit constraints at the firm and industry levels and reveals the effects of the interaction mechanisms of trade policy uncertainty and credit constraint heterogeneity on exporters’ behaviour. The model confirms that the higher the level of industrial credit constraints, the greater the interaction of trade policy uncertainty and credit constraint heterogeneity, but firms with lower levels of credit constraints within a specific industry are more affected by this interaction. Then, based on the highly dis-aggregated trade data of China’s firms from 2000 to 2013, this paper provides empirical evidence for the main predictions and mechanisms of the theoretical model.

Distance(S) and the Volatility of International Trade(S)

Does distance matter for the volatility of international real and financial transactions? We show that it does, in addition to its well-established relevance for the level of trade. A simple model of trade with endogenous markups shows that demand shocks have a larger impact on trade between more distant countries. We test this implication in two steps, relying on a broad range of real and financial transactions measures, as well as several different metrics of distance (physical, linguistic, and internet). We first show that during the Great Trade Collapse of 2007-09 international transactions fell more between countries that are more distant along the various metrics, and find that the different distance measures magnify each other's respective impacts. We then focus on a longer panel analysis of trade in goods and show that trade is more volatile between more distant countries, with again a magnification pattern across metrics of distance.

The 2008 Financial Crisis and the Lack of Retaliatory Trade Intervention

Abstract The 2008 financial crisis did not precipitate global retaliatory trade intervention, in seeming contrast to the Great Depression in 1930s. This article discusses the influence of model structure in optimal tariff (OT) calculations in explaining this puzzle. We emphasize how earlier literature reports high OTs in numerical calculation (of a hundred percent) but only uses simple trade models. We use numerical general equilibrium (GE) calibration and simulation methodology to calculate OTs both with and without retaliation in a series of observationally equivalent models and explore the influence of model structures on OT levels. We gradually add more realistic features into the basic GE model, and show sharply declined OTs, which suggests that trade retaliation incentives effectively disappear with the deepening of globalization in 2008 compared to 1930. (JEL codes: F11, C63, F13).

A simple model of time zone differences, virtual trade and informality

Purpose This paper aims to strive to model virtual trade resulting from time zone differences in an otherwise Heckscher–Ohlin set up which is absent in the literature. So, the paper adds some value to the existing literature on time zones (TZ) and trade. Design/methodology/approach A competitive general equilibrium model is developed first to capture the effect of TZ differences on virtual trade. Then the authors examine, in brief, if distance can be accommodated in such framework. Finally, the authors extend the model to incorporate informality. Findings It is seen that exploitation of time zone difference benefits skilled labor and hurts capital under reasonable assumption. In what follows, time zone difference exploiting sector expands, whereas the other sector contracts. Then, the model has been extended to examine how distance may also lead to similar outcomes. In addition, the model is further modified to explore the effect of virtual trade in an informality and associated extortion ridden economy. Interestingly, virtual trade turns out to be beneficial to unskilled workers as well, and leads to a fall in the number of extortionists, though informal production is augmented. Research limitations/implications This model is a competitive model that may not clearly reflect the realistic world. However, interestingly this may form the basis of looking into some other appealing dimensions of the real world. Originality/value TZ and related communication-cost-driven trade arguments are relatively less explored theoretically. Therefore, the work adds some value to the theoretical understanding of outsourcing in service trade that uses day-night differences across the globe.

Trade and commodity taxes as environmental instruments in an open economy

PurposeIn a simple reciprocal dumping model of trade, this study scrutinizes the strategic role of trade and commodity taxes as environmental instruments when consumption of an imported product generates pollution. The results suggest that for sufficiently small values of the marginal disutility from pollution, commodity taxes can be preferred over import tariffs, and compared to the case of trade policies, free trade can be welfare dominating even for higher values of the marginal disutility from pollution when commodity taxes are used strategically as environmental instruments.Design/methodology/approachThe authors employ a reciprocal dumping model of trade.FindingsA sufficiently high marginal disutility from pollution (or sufficient asymmetries between the countries in terms of their marginal disutility from pollution) may jeopardize bilateral trade, especially if countries are given the option to set tariffs freely for imported goods (consumption of which generate environmental pollution). For sufficiently weak transboundary pollution and sufficiently low marginal disutility from pollution, (1) both Nash trade and domestic policies may prove to be helpful in addressing consumption-based pollution, and (2) it is possible to show in such a case that Nash domestic policies may be preferred over Nash trade policies, especially when both transboundary pollution and the trading partner's marginal disutility from pollution are sufficiently low.Originality/valueThe novel contribution of this paper is (1) to capture asymmetries among trading partners in terms of how much they account for environmental pollution when deciding on their (domestic/trade) policy measures and (2) to focus on environmental degradation that is caused by final consumption of a product imported from a trading partner.

Globalization, the skill premium, and income distribution: the role of selection into entrepreneurship

This paper proposes a novel channel by which trade affects the skill premium and the household income distribution: the selection-into-entrepreneurship mechanism. Trade liberalization intensifies competition for profit, discouraging less able educated workers from sorting into entrepreneurship and increasing the skill supply. As a result, the return to college declines, leading college enrollment to decrease. We illustrate this mechanism with a simple trade model and show that while highly talented households optimally respond to export opportunities by engaging in entrepreneurial investment and moving up the income distribution, less able educated households self-select downward along the income distribution, which gradually results in household income polarization. Using Chinese household survey data, we employ a Bartik-type instrument for export expansion to investigate how globalization affects the return to college, the selection into entrepreneurship, and the income distribution. The analysis shows that regions facing more export exposure are associated with a larger drop in the skill premium, a greater selection effect on household business ownership, and a stronger polarization pattern in the household income distribution. The entrepreneurship angle highlighted by this paper offers another lens through which to study the broader impact of trade shocks on workers’ occupation sorting and the distribution of income.

Testing and implementing a new approach to estimating interregional output multipliers using input–output data for South Korean regions

ABSTRACTFlegg's location quotient (FLQ) is a useful tool for estimating intraregional output multipliers. This paper uses it as one component when estimating interregional multipliers. Using statistical information criteria and official data for 16 South Korean regions, it is found that the best approach is to combine the FLQ with a simple trade model. The paper explains how the proposed procedure can be implemented for both multiple and individual regions, and also how a region-specific value for the unknown parameter in the FLQ formula can be determined. Finally, an illustrative case study of one of the regions is carried out.

National Policy for Regional Development: Historical Evidence from Appalachian Highways

Abstract How effective are policies aimed at integrating isolated regions? We answer this question in the context of a highway system in one of the poorest regions in the United States. With construction starting in 1965, the Appalachian Development Highway System (ADHS) ultimately consisted of over 2,500 high-grade road miles. We use a simple model of interregional trade to motivate our empirical analysis, which quantifies the relationship between market access and income. We then calibrate the model to evaluate the aggregate impact of the ADHS and compare this with alternative counterfactual proposals. We find that removing the ADHS would have reduced total income by $53.7 billion in the United States, with $22 billion of the losses in Appalachian counties. Our findings highlight the potential aggregate benefits of transportation infrastructure policies and suggest that leakage outside the targeted area may be substantial.

Inefficiency in a Simple Model of Production and Bilateral Trade

We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.

Contractual imperfections and the impact of crises on trade: Evidence from industry-level data

We use industry-level data to study the effects of imperfect contract enforcement on international trade during crises. To guide the empirical work, we build a simple trade model with contractual imperfections, in which an adverse aggregate shock in the importing country generates a disproportionate decline in imports in more contractually vulnerable industries. Using disaggregated trade data for more than 120 countries and different industry measures of contractual dependence, we find robust support for the model's predictions. Our empirical approach exploits the variation in the occurrence of recessions and financial crises across countries and years, and the variation in contractual dependence across manufacturing industries. We show that the amplification effects of contractual dependence on sectoral imports are statistically and economically significant.

A simple model of production and trade in an oligopolistic market: back to basics

Abstract We provide a two good model of oligopolistic production and trade with one good being commodity money. There is the usual demand function of the consumers for the produced good that producer-sellers face. Each seller is a budget constrained preference maximizer and derives utility (or satisfaction) from consuming bundles comprising commodity money and the produced good. We define a competitive equilibrium strategy profile and a Cournotian equilibrium and show that under our assumptions both exist. We further show that at a competitive equilibrium strategy profile, each seller maximizes profits given his own consumption of the produced good and the price of the produced good, the latter being determined by the inverse demand function. Similarly we show that at a Cournotian the sellers are at a Cournot equilibrium given their own consumption of the produced good. Assuming sufficient differentiability of the cost functions we show that at a competitive equilibrium each seller either sets price equal to marginal cost or exhausts his capacity of production; at a Cournotian equilibrium each seller either sets marginal revenue equal to marginal cost or exhausts his capacity of production. We also study the evolution of Cournotian strategies as the sellers and buyers are replicated. As the number of buyers and sellers go to infinity any sequence of interior symmetric Cournotian equilibrium strategies admits a convergent subsequence, which converges to an interior symmetric competitive equilibrium strategy. In a final section we discuss the Bertrand Edgeworth price setting game and show that a Bertrand Edgeworth equilibrium must be a derived from a competitive equilibrium price. Here we show that if at a symmetric competitive equilibrium, the sellers consume positive quantities of the produced good then the competitive equilibrium cannot be a Bertrand Edgeworth equilibrium. Thus, if at all symmetric competitive equilibria the sellers consume positive amounts of the produced good, then a Bertrand Edgeworth equilibrium simply does not exist.

Why is carbon leakage for energy-intensive industry hard to find?

A number of researchers have found that imports by pollution heavy industries do not increase in response to tighter pollution policy. We empirically evaluate the impact of an sudden and unexpected increase in Swedish electricity prices in the 2000s on the imports of intermediate inputs by Swedish manufacturers. We find that imports declined as domestic electricity prices rose for firms with the most electricity-intense in-house production. We rationalize these findings by developing a simple model of trade in intermediate inputs, which illustrates that energy-intense firms may decrease imports if it is sufficiently difficult to substitute between domestic- and foreign-sourced inputs as domestic energy prices rise. The offshoring mechanism which we identify can help to reconcile conflicting empirical results in the carbon leakage and pollution haven literature, and also has implications for determining the extent to which energy intense trade-exposed sectors should be exempt from domestic climate change policy.

Uneven Growth in the Extensive Margin: Explaining the Lag of Agricultural Economies

This paper documents that growth in the extensive margin is on average lower in the agricultural sector than in other activities. I introduce this new fact into a simple model of trade with expanding-variety growth, to show its relevance for regions specialized in the lagging sector. Diversity-loving consumers endogenously reduce the share of their expenditure devoted to that sector. The region specialized in it receives a decreasing share of world income, which results in diverging income and welfare trajectories with respect to the rest of the world. Appropriating a decreasing share of world value pushes downward the relative wage of the agricultural region and lowers the price of its exports relative to that of its imports, resulting in terms of trade deterioration. The prediction of falling terms of trade for the region specialized in the lagging agricultural sector is supported by empirical evidence and separates the results of my theory from those obtained in a similar model of uneven output growth between sectors. I present empirical evidence for the main testable results of the model. This theory is the first replicating these facts without the need of heterogeneous consumers or products, nor resorting to political or institutional explanations.

Trade and Growth: A Simple Model with Not-so-Simple Implications

We present a simple model of international trade (IT) and growth. The model yields a unique equilibrium path in which the relationship between exogenous and endogenous variables does not resemble the equations estimated by the empirical literature: Ours are not linear, despite the fact that technology and demand are linear, they do not include variables used in this literature like shares of IT and investment and include variables that have never been used in this literature such as comparative and absolute advantage, specialization patterns, saving habits and technology of partner countries. Finally, the impact of the initial level of income and the number of years that the economy has been open is far more complicated that had been assumed by the literature.

Trade and growth: A simple model with NOT-SO-Simple implications

We present a simple model of international trade (IT) and growth. The model yields a unique equilibrium path in which the relationship between exogenous and endogenous variables does not resemble the equations estimated by the empirical literature: Ours are not linear, despite the fact that technology and demand are linear, they do not include variables used in this literature like shares of IT and investment and include variables that have never been used in this literature such as comparative and absolute advantage, specialization patterns, saving habits and technology of partner countries. Finally, the impact of the initial level of income and the number of years that the economy has been open is far more complicated than had been assumed by the literature.

General Purpose Technologies and their Implications for International Trade

Abstract This paper develops a simple model of trade and “quality-ladders” growth without scale effects to study the implications of general purpose technologies (GPTs) for international trade. GPTs refer to a certain type of drastic innovations, such as electrification, the transistor, and the Internet, that are characterized by the pervasiveness in use, innovational complementarities, and technological dynamism. The model presents a two-country (Home and Foreign) dynamic general equilibrium framework and incorporates GPT diffusion within Home that exhibits endogenous Schumpeterian growth. The model analyzes the long-run and transitional dynamic effects of a new GPT on the pattern of trade and relative wages. The main findings of the paper are: 1) when the GPT diffusion across industries is governed by S-curve dynamics, there are two steady-state equilibria: the initial steadystate arises before the adoption of the new GPT and the final one is reached after the GPT diffusion process has been completed, 2) when all industries at Home have adopted the new GPT, Home enjoys comparative advantage in a greater range of industries compared to Foreign, 3) during the transitional dynamics, Foreign gains back its competitiveness in some of the industries that lost its comparative advantage to Home.

Reputation and Learning: Japanese Car Exports to the United States

This paper incorporates learning and reputation building into a simple dynamic stochastic model of international trade with asymmetric information. We use the model to study a bilateral trade flow influenced significantly by learning and reputation, namely U.S. imports of Japanese cars over the period 1961-2005. Numerical simulations replicate the trade flow in a robust fashion. In addition to matching this event, we explore further implications of our framework for understanding international trade patterns. Since learning and reputation building require time, predicted short run trade patterns can be quite different than those predicted in the long run. Sectorial differences in the speed of learning and reputation building affect predicted trade patterns. The extent of asymmetric information existing between importers and exporters also changes under different trade policies.

Buy National or Buy International? The optimal design of government spending in an open economy

Should governments only purchase domestic goods to increase welfare? And would government spending be higher if it was used for domestic goods only? Such proposals, which we call Buy National, were discussed in many countries in the context of the fiscal stimuli used to fight the recent global recession. We augment a simple trade model by government spending and find that the optimal size of government spending of Buy National is higher than the optimal level of government spending that does also include foreign-produced goods (Buy International). However, even though the optimal level of government spending is higher, real GDP and hence welfare are both lower in the Buy National regime.