Discussion paper

DP4634 The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity: A Comment

Melitz (2003) demonstrates that greater trade openness raises industry productivity via a selection effect and via a production re-allocation effect. Our comment points out that the set-up assumed in the Melitz model displays a trade off between static and dynamic efficiency gains. That is, although freer trade improves industry productivity in a level sense, it harms it in a growth sense. To make this point as simply as possible, we introduce a slight modification to the model that endogenises the growth rate of industry productivity and we show that liberalization slows growth.

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Citation

Baldwin, R and F Robert-Nicoud (2004), ‘DP4634 The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity: A Comment‘, CEPR Discussion Paper No. 4634. CEPR Press, Paris & London. https://cepr.org/publications/dp4634