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Trade liberalisation with mobile capital and firm heterogeneity
Author(s) -
Yang Xi,
Zeng DaoZhi
Publication year - 2021
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12983
Subject(s) - economics , welfare , productivity , capital (architecture) , capital good , free trade , international economics , liberalization , gains from trade , monetary economics , international trade , goods and services , macroeconomics , market economy , archaeology , history
This paper develops a general equilibrium model that captures the delocation of firms, imbalance of trade in goods and firm selection into export markets. We show that, in the presence of capital being mobile across countries and firms being heterogeneous in productivity, the spatial inequalities in wages and firm allocations are differently affected by trade liberalisation. We explore the welfare effects of trade through two channels: changes in the share of expenditure on domestic goods and factor price adjustments to the spatial reallocation of capital. Selection into export markets magnifies the impact of mobile capital on the welfare gains from trade.