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

Author(s): Richard Baldwin, Frédéric Robert-Nicoud
Publication Date: September 2004
Keyword(s): dynamic versus static efficiency, endogenous growth, heterogenous firms, trade liberalization
JEL(s): H32, P16
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4634

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.