Showing papers by "Robert C. Feenstra published in 1994"

New product varieties and the measurement of international prices

Abstract: The high income elasticity of demand often estimated for U.S. imports may be a spurious result of omitting new product varieties from the import price indexes. The purpose of this paper is to demonstrate how to incorporate new product varieties into a constant-elasticity-of-substitution aggregate of import prices. This method is applied to U.S. imports of six disaggregate manufactured goods. It is shown that the corrected indexes are able to account for part--but not all--of the high income elasticities. (JEL C43, F14)

Accounting for Growth With New Inputs

Abstract: This paper examines the aggregate production function in an economy characterized by the creation of new, intermediate inputs. The authors show how growth can be decomposed into changes in higher quantities of existing inputs and a greater range of inputs. Indexes of total factor productivity would reflect the latter. The authors construct a dynamic monopolistic-competition model in which products are endogenously introduced and simulate that model to produce artificial data. When used in standard growth-accounting regressions, the data can appear to be generated by an economy with exogenous technical change and (approximately) constant returns to primary factors. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Bias in U.S. Import Prices and Demand

Abstract: The purpose of the paper is to measure the potential bias in the U.S. import price index due to the appearance of new product varieties, or new foreign suppliers, and determine the effect of this bias on the estimated income elasticity of import demand. Existing import price indexes are based on a sample of products from importing firms. We argue that if the share of import expenditure on the sampled products is falling over time, this will lead to an upward bias in the measured index. Using a correction based on the falling expenditure share on sampled countries, we find that the income elasticity of aggregate U.S. import demand is reduced from 2.5 to 1.7, or about halfway to unity. Our estimates suggest that the aggregate import price index is upward biased by about one and one-half percentage points annually.

Passthrough of Exchange Rates and Purchasing Power Parity

Abstract: In this paper we develop and test two hypotheses about purchasing power parity (PPP) derived from the pricing behavior of profit- maximizing, exporting firms. The first is that changes in the price of traded goods relative to domestic substitutes, due to partial pass- through of exchange rates, will affect the PPP relation. The second is that PPP should hold on forward rather than spot exchange rates, due to hedging by firms. Using quarterly data for the United States, Canada, France, Germany, Japan and the United Kingdom, we find considerable support for the first but not the second hypothesis.

Pass-Through of Exchange Rates and Purchasing Power Parity

Abstract: In this paper we develop and test two hypotheses about purchasing power parity (PPP) derived from the pricing behavior of profit- maximizing, exporting firms. The first is that changes in the price of traded goods relative to domestic substitutes, due to partial pass- through of exchange rates, will affect the PPP relation. The second is that PPP should hold on forward rather than spot exchange rates, due to hedging by firms. Using quarterly data for the United States, Canada, France, Germany, Japan and the United Kingdom, we find considerable support for the first but not the second hypothesis.

International Trade and Investment

Abstract: Research activities of the NBER's Program in International Trade and Investment can be grouped into four broad areas: trade patterns (static and dynamic); trade policy; regional and multilateral trade agreements; and foreign direct investment. Much of the research is motivated by the policy experience of the United States and other countries, and one goal of the program is to evaluate the outcome of these international policies. Another goal is to understand the determinants of trade policies and trade patterns. To this end, members of the program are engaged actively in developing models of endogenous growth, economic geography, and political economy, applied to questions of international (or regional) trade. Trade Patterns Current research has moved beyond resource endowments as a determinant of static trade patterns, and has introduced monopolistic competition and product diversity as an explanation for trade flows. Elhanan Helpman has shown that when countries are fully specialized in unique product varieties, and tastes are the same across nations, then a relatively simple equation relating trade flows to country sizes can be obtained.(1) This equation fits the data well for the OECD countries. David Hummels and James A. Levinsohn have reconsidered this empirical evidence, and have shown that the same equation also fits well for a group of non-OECD countries, including various South American and African nations.(2) Since we do not expect that the trade patterns of the latter countries are determined by monopolistic competition, there is a puzzle as to what is being explained by this equation. Along with Tzu-Han Yang and the sociologist Gary G. Hamilton, I provided further evidence on the link between market structure and trade patterns.(3) Hamilton's firm-level data on business groups in Japan, Korea, and Taiwan show dramatic differences in the type of vertical and horizontal integration within these countries. We argue that these market structures should correspond to different trade patterns, and in particular, that greater vertical integration (and resulting economies of scale) should lead to less product diversity. We confirm this hypothesis by comparing Taiwan and Korea, in that Korea has less diversity in its exports to the United States. Japan has greater product variety than either of these countries, and that is explained by its substantial size. Dani Rodrik, and later we, provided evidence on the composition or "quality" of export from these countries (measured by a comparison of unit-values and price indexes).(4) The dynamics of trade have been extensively analyzed in theory by Gene M. Grossman and Helpman,(5) and various researchers have begun to test these models. David T. Coe and Helpman find that both a country's R and D stock and the R and D stock of its trade partners affect the country's total factor productivity, supporting the idea that knowledge diffuses across borders through trade.(6) James R. Markusen and I have developed empirical measures of product variety that could be applied to growth accounting.(7) In ongoing work, Jonathan Eaton and Sam Kortum test for international technological diffusion using data on patents within the OECD countries. Magnus Blomstrom, Robert E. Lipsey, and Mario Zejan have examined the determinants of developing country growth, finding that inflows of direct investment, along with secondary education and labor force participation, are major factors.(8) The empirical evidence linking trade and growth will be the topic of an upcoming NBER-CEPR International Seminar on International Trade, organized by Robert E. and Richard E. Baldwin, to be reviewed in a future NBER Reporter. Dynamic patterns of regional trade play a central role in recent models of economic geography, as developed especially by Paul R. Krugman.(9) Kiminori Matsuyama and Takaaki Takahashi have investigated the welfare properties of the equilibrium in which one region dominates, and show that such concentration can reduce welfare. …