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Productive Capacity, Product Varieties, and the Elasticities Approach to the Trade Balance
Author(s) -
Gag Joseph E.
Publication year - 2007
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2007.00696.x
Subject(s) - economics , balance of trade , order (exchange) , international economics , balance (ability) , product (mathematics) , terms of trade , growth model , international trade , macroeconomics , medicine , geometry , mathematics , finance , physical medicine and rehabilitation
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.