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November 22, 2004

Three Theories of International Trade;Hummels Paper

Professor Hummels visited here Friday and taught me a few things. Here are some notes from a paper of his, Hummels \& Klenow's "THE VARIETY AND QUALITY OF A NATION'S TRADE":

Gallup, Sachs and Mellinger (1998) find that a country's access to navigable waterways is strongly related to its trade and development. Gallup, Sachs and Mellinger (1998), "Geography and Economic Development," NBER Working Paper #6849, December.

Frankel and Romer (1999) find that distance from other economies is very negatively related to its trade and per capita income. Frankel, Jeffrey and David Romer (1999), "Does Trade Cause Growth?," American Economic Review 89(3), 379-399.

Professor Hummels gave a seminar here, and explained part of the paper to me. Suppose a large country expands its exports. Three things might happen:

1. Products are homogeneous, and each firm produces more. This reduces the price they can get on the world market. This is the traditional, 1960's trade model.

2. Products are differentiated horizontally-- by variety. When prices start to fall with increased output, it becomes more profitable to start producing new products. So prices don't fall- they stay the same. This is the Krugman-style, monopolistic competition model.

3. Products are differentiated vertically-- by quality. When prices start to fall with increased output, it becomes more profitable to start producing a higher-quality product. So prices don't fall- they rise (though costs rise too). This isthe model of Hummels and Klenow.

Posted by erasmuse at November 22, 2004 02:50 PM

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