The small open economy in a generalized gravity model

Demidova, Svetlana; Kucheryavyy, Konstantin; Naito, Takumi; Rodríguez-Clare, Andrés

Abstract

To provide sharp answers to basic questions in international trade, a standard approach is to focus on a small open economy (SOE). Whereas the classic tradition is to define a SOE as an economy that takes world prices as given, in the new trade literature it is defined instead as one that takes foreign-good prices and export demand schedules as given. We develop a gravity model that nests all its standard microfoundations and show how to take the limit so that an economy that becomes infinitesimally small behaves like a SOE. We then derive comparative statics and optimal policy for the SOE. Ignoring standard tax indeterminacies, optimal policy is characterized by export taxes and import tariffs equal to the (inverse) foreign demand and supply elasticities, respectively, and employment subsidies determined by the scale elasticity (under perfect competition) or markups (under monopolistic competition).

Citation

Demidova, S., Kucheryavyy, K., Naito, T., & Rodríguez-Clare, A. (2024). The small open economy in a generalized gravity model. Journal of International Economics, 152, Article 103997. https://doi.org/10.1016/j.jinteco.2024.103997

• Journal Article Type: Article
• Acceptance Date: Aug 20, 2024
• Online Publication Date: Aug 29, 2024
• Publication Date: 2024-11
• Deposit Date: Sep 11, 2024
• Publicly Available Date: Sep 11, 2024
• Journal: Journal of International Economics
• Print ISSN: 0022-1996
• Electronic ISSN: 1873-0353
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 152
• Article Number: 103997
• DOI: https://doi.org/10.1016/j.jinteco.2024.103997
• Public URL: https://nottingham-repository.worktribe.com/output/39457619
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0022199624001247
• Additional Information: This article is maintained by: Elsevier; Article Title: The small open economy in a generalized gravity model; Journal Title: Journal of International Economics; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jinteco.2024.103997; Content Type: article; Copyright: © 2024 The Author(s). Published by Elsevier B.V.