Timothy J. Kehoe

How and Why Does Trade Grow?

Indiana University

December 2008

Class notes

Notes on models with heterogeneous firms

Lecture 1. The New Trade Theory and its Applications

Questions:

1. Why has merchandise trade grown so much faster than manufacturing output?

2. Why did the applied general equilibrium models used to analyze the impact of NAFTA fail to predict which sectors would have the largest increases in trade?

3. Which goods are exported more after trade liberalization, those with large exports volumes before the liberalization or those with small export volumes?

Readings:

R. Bergoeing and T. J. Kehoe, “Trade Theory and Trade Facts,” Federal Reserve Bank of Minneapolis, 2003.

P. J. Kehoe and T. J. Kehoe, “A Primer on Static Applied General Equilibrium Models,” Federal Reserve Bank of Minneapolis Quarterly Review, 18:2 (1994), 2-16. 

T. J. Kehoe, “An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA,” in T. J. Kehoe, T. N. Srinivasan, and J. Whalley, editors, Frontiers in Applied General Equilibrium Modeling: Essays in Honor of Herbert Scarf, Cambridge University Press, 2005, 341-77.

T. J. Kehoe, C. Polo, and F. Sancho, “An Evaluation of the Performance of an Applied General Equilibrium Model of the Spanish Economy,” Economic Theory, 6 (1995), 115-141.

T. J. Kehoe and K. J. Ruhl, “How Important is the New Goods Margin in International Trade?” Federal Reserve Bank of Minneapolis, 2002.

J. Markusen, “Explaining the Volume of Trade: An Eclectic Approach,” American Economic Review, 76 (1986), 1002-1011.

K.-M. Yi, “Can Vertical Specialization Explain the Growth of World Trade?” Journal of Political Economy, 111 (2003), 52-111.

Lecture 2. Trade Models with Heterogeneous Firms

Questions:

4. Some firms export, others do not. Which approach to modeling this phenomenon is more compatible with empirical evidence, fixed costs of exporting or Ricardian corner solutions?

1. Researchers have focused on the decisions of firms to export. Why not study the decision to import?

2. Are there theoretical alternatives to the fixed costs assumed most researchers that can allow models to better account for the data?

Readings:

C. Arkolakis, “Market Access Costs and the New Consumers Margin in International Trade,” University of Minnesota, 2006.

T. Chaney, “Distorted Gravity: Heterogeneous Firms, Market Structure, and the Geography of International Trade,” University of Chicago, 2005.

J. Eaton, S. Kortum, and F. Kramarz, “An Anatomy of International Trade: Evidence from French Firms,” University of Minnesota, 2005.

M. J. Melitz, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.” Econometrica, 71 (2003), 1695-1725.

A. Ramanarayanan, “International Trade Dynamics with Intermediate Inputs,” University of Minnesota, 2006.

K. J. Ruhl, “Solving the Elasticity Puzzle in International Economics,” University of Texas at Austin, 2008.

---

Home Page | Research | Publications | C.V. | Teaching | Computation | Personal | Data

URL: http://www.econ.umn.edu/~tkehoe/classes/iu-08.html/ 

© 2008 by the Regents of the University of Minnesota.
All rights reserved. 
Comments to: tkehoe@econ.umn.edu
Last modified: 28 November 2008 14:43