We present a North-South model of international trade in which differentiated products are developed in the North. Sectors are populated by final-good producers who differ in productivity levels. On the basis of productivity and sectoral characteristics, firms decide whether to integrate into the production of intermediate inputs or outsource them. In either case they have to decide from which country to source the inputs. Final-good producers and their suppliers must make relationship-specific investments, both in an integrated firm and in an arm’s-length relationship. We describe an equilibrium in which firms with different productivity levels choose different ownership structures and supplier locations. We then study the effects of withinsectoral heterogeneity and variations in industry characteristics on the relative prevalence of these organizational forms. I.

This paper surveys trade costs — what we know, and what we don’t know but may usefully attempt to find out. Partial and incomplete data on direct measures of costs go together with inference on implicit costs from the pattern of trade across countries. Representative margins for full trade costs in rich countries exceed 170% based on our pushing the data very hard. Poor countries face even higher trade costs. There is a lot of variation across countries and across goods within countries, much of which makes economic sense. Theory looms large in our survey, providing interpretation and perspective on the one hand and suggesting improvements for the future on the other hand. Some new results are presented to apply and interpret gravity theory properly and to handle aggregation appropriately. I

Exchange rate regime optimality, as well as monetary policy effectiveness, depends on the tightness of the link between exchange rate movements and import prices. Recent debates hinge on whether producer-currency-pricing (PCP) or local currency pricing (LCP) of imports is more prevalent, and on whether exchange rate passthrough rates are endogenous to a country’s macroeconomic conditions. We provide cross-country and time series evidence on both of these issues for the imports of twenty-five OECD countries. Across the OECD and especially within manufacturing industries, there is compelling evidence of partial pass-through in the short-run– rejecting both PCP and LCP. Over the long run, PCP is more prevalent for many types of imported goods. Higher inflation and exchange rate volatility are weakly associated with higher pass-through of exchange rates into import prices. However, for OECD countries, the most important determinants of changes in pass-through over time are microeconomic and relate to the industry composition of a country’s import bundle.

Summer Econometric Society Meetings, the SED Meetings, and the Fed System

We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods. (JEL F11, F16) The nature of international trade is changing. For centuries, trade mostly entailed an exchange of goods. Now it increasingly involves bits of value being added in many different locations, or what might be called trade in tasks. Revolutionary advances in transportation and communications technology have weakened the link between labor specialization and geographic concentration, making it increasingly viable to separate tasks in time and space. When instructions can be delivered instantaneously, components and unfinished goods can be moved quickly and cheaply, and the output of many tasks can be conveyed electronically, firms can take advantage of factor cost disparities in different countries without sacrificing the gains from specialization. The result

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We combine input-output and bilateral trade data to quantify cross-border production linkages. Using a complete trading system, we compute bilateral trade in value added for 87 countries and regions. The ratio of value added to gross exports is a measure of the intensity of production sharing. Across sectors, manufacturing has a relatively low ratio and thus accounts for a smaller share of exported value added than gross exports. Across countries, aggregate ratios are negatively correlated with exporter income, primarily due to cross-country differences in the composition of exports. Across bilateral partners, ratios vary widely and contain information on both bilateral and triangular production chains. Further, bilateral imbalances measured in value added differ from gross imbalances.

We develop a dual representation of the technology of international fragmentation for an industry using 2 factors in a continuum of stages. We then derive a generalised factor price frontier which incorporates an endogenous adjustment of the margin fragmentation. Using this frontier in a 2×2 general equilibrium model, we investigate the role of outsourcing in the adjustment to a decline in the final output price of the multistage industry, and the attendant factor price effects. We also explore the implications of an improved technology of international fragmentation on the margin of fragmentation and on domestic factor prices.

One of the most striking aspects of the recent recession is the collapse in international trade. This paper uses disaggregated data on U.S. imports and exports to shed light on the anatomy of this collapse. We find that the recent reduction in trade relative to overall economic activity is far larger than in previous downturns. Information on quantities and prices of both domestic absorption and imports reveals a 40 % shortfall in imports, relative to what would be predicted by a simple import demand relationship. In a sample of imports and exports disaggregated at the 6-digit NAICS level, we find that sectors used as intermediate inputs experienced significantly higher percentage reductions in both imports and exports. We also find support for compositional effects: sectors with larger reductions in domestic output had larger drops in trade. By contrast, we find no support for the hypothesis that trade credit played a role in the recent trade collapse.

I focus on three features of international markets: first, people mainly consume home produced goods (the “home bias in consumption puzzle”). Second, they hold a disproportionate share of domestic assets (the “home bias in portfolio puzzle”). Third, countries that are more open to trade are also more financially open. Following Obstfeld and Rogoff [2000], I ask whether one can replicate these three broad facts by simply adding trade costs in a two-country stochastic equilibrium model. Since trade costs generate deviations from “purchasing power parity ” i.e real exchange rate fluctuations, equilibrium portfolios deviate from the market portfolio but not systematically in favor of domestic equities. The direction of the bias in equity portfolios depends crucially on the risk aversion of consumers, on the substituability between domestic and foreign goods and on the size of trade costs. Under reasonable parameters values, trade costs actually worsen the “home bias in portfolio puzzle”. To reconcile facts and theory, I propose a combination of small frictions between financial markets and large trade costs on goods market. Obviously frictions in financial markets lead to “home bias in portfolio ” but it is not the whole story. The interaction between both types of frictions also matters: reducing trade costs increases competition in goods market, which increases the volatility of domestic incomes. Facing higher risks, people want more diversified portfolios and increase their holdings of foreign assets for a given level of frictions in financial markets.