International Finance Discussion Papers (IFDP)
October 2003 (Revised October 2004)
Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance
Joseph E. Gagnon
Abstract:
Most macroeconomic models imply that faster output growth tends to lower a country's trade balance by raising its imports with little change to its exports. 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 U.S. imports from different source countries and finds strong support for Krugman's model.
Original version (PDF)Keywords: Import demand, income elasticity, international trade, product differentiation
PDF: Full Paper
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