Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance

Abstract

Most macroeconomic models imply that faster income growth tends either to lower a country's trade balance by raising its imports with little change to its exports or to reduce its terms of trade in order to maintain balanced trade. Krugman (1989 ) proposed a model in which countries grow by producing new varieties of goods. In his model, faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of US imports from different source countries and finds strong support for Krugman's model. Copyright � 2007 The Author; Journal compilation � 2007 Blackwell Publishing Ltd.

Varieties and the transfer problem

“…4 Yi (2003), Kehoe andRuhl (2009), andRuhl (2008) show that trade liberalization results in a significant increase of the extensive margin. The role of product varieties in international trade is also emphasized in Gagnon (2007) which -building on Krugman's (1989) notion that economic growth is channeled into product proliferation -provides evidence on the strong correlation between the growth of U.S. bilateral manufactured imports between 1972 and 2000 and the average growth rate of GDP of the exporting countries. 5 An exception worth emphasizing is Brakman and van Marrewijk (1995).…”

Growth, Expansion of Markets, and Income Elasticities in World Trade

“…Finally, there have only been a very limited number of empirical tests on such a relationship. Gagnon (2003) analyzes the growth of US imports from different source countries and finds strong support for Krugman's model. Ghatak and Price (1996) find no supporting evidence from nine East Asian economies for the period 1960-93.…”

Economic convergence and the fundamental equilibrium exchange rate in central and eastern Europe

“…Parameters α 1 and α 2 stand for potential output and price elasticities of exports, respectively. A similar specification of exports equation was derived by Gagnon (2007). He used a differentiated goods model à la Krugman (1989), by taking into account "love for variety" into a micro-founded optimizing framework.…”