NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tradability, Productivity, and Understanding International Economic Integration

Paul R. Bergin, Reuven Glick

NBER Working Paper No. 11637
Issued in September 2005
NBER Program(s):   IFM   ITI

This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin, price dispersion has not decreased and may even have increased. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers overall price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.

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Document Object Identifier (DOI): 10.3386/w11637

Published: Bergin, Paul R.and Reuven Glick. "Tradability, Productivity, and International Economic Integration." Journal of International Economics 73 , 1 (2007): 128-151.

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