Q2. What future works have the authors mentioned in the paper "Global imbalances revisited: the transfer problem and transport costs in monopolistic competition∗" ?
20 A careful empirical investigation of these mechanisms is still missing and seems an important challenge for future research in international finance and trade.
Q3. What is the main lesson of the Dixit-Stiglitz-Krugman model?
Its main lesson is that a trade surplus is unambiguously welfare reducing because it involves a double burden, i.e., an income transfer to the trading partner and a terms-of-trade deterioration.
Q4. What is the dominant approach in the literature on trade imbalances?
the dominant approach in the literature on trade imbalances builds on the assumptions of perfectly competitive markets and constant returns to scale.
Q5. What is the effect of a price change on the relative wage of Home?
Recall that TR = 1 in the absence of price effects, and that an increase in (a depreciation of Home’s exchange rate) also corresponds to a reduction in Home’s relative wage.
Q6. What is the closest paper to ours?
The closest paper to ours is Corsetti, Martin and Pesenti (2013), who develop a twocountry model of monopolistic competition to study how the entry margin affects the price effects of a transfer.
Q7. What are the other conditions needed to track the relationship between wi and i?
recall that total expenditure on manufacturing goods equals Ei = 1 + µnipi, which can the authors rewritten using (23) asEi = 1 + µ1− µwiλi. (24)The remaining equilibrium conditions needed to track the relationship between wi and λi are, first, the expression for the price index:P 1−σh (1− µ) = λhw 1−σ(1−µ) h P −σµ h + φ 1−σλfw 1−σ(1−µ) f P −σµ f , (25)in which ni and pi have been substituted out; and, second, the market clearing condition for a firm:1 = qh = (w 1−µ h P µ h ) −σ [ P σ−1h Eh + φ σP σ−1f Ef ] . (26)Given and λi, these equations can be solved for Pi, Ei and wh.
Q8. How do the authors get an analytical expression for dwh/dh?
As in that paper, by linearizing the system of equations in the symmetric equilibrium the authors can obtain an analytical expression for dwh/dλh.
Q9. What are the features of the differentiated sector?
These are realistic features: the differentiated sector stands for manufacturing production, which is far more traded than services, and trade is not balanced in general.
Q10. What is the elasticity of the price index Pi?
As usual, demand for a given good is increasing in the price index Pi and decreasing in its own price, with an elasticity equal to σ.
Q11. What are the welfare implications of trade imbalances?
Despite their prevalence, the welfare implications of these imbalances are not fully understood, because trade models typically focus on the assumption of balanced trade, while models of international finance often focus on inter-temporal rather intra-temporal trade.
Q12. Why does the model have a production-delocation effect?
This is because the model features a production-delocation effect, in that a trade surplus requires a reallocation of labor towards tradeables.
Q13. What is the ideal price index associated with Ci(M)?
The ideal price index associated with Ci(M) is:Pi = (∫ n 0 p̃i(z) 1−σdz ) 1 1−σ , (2)where p̃i(z) is the local-currency final price of variety z, gross of any trade cost.
Q14. What is the effect of a devaluation on the price index of Home firms?
This result, that a devaluation lowers the price index due to the change in the number of firms, is similar to the production-delocation effect first noticed by Venables (1987) in the context of an iceberg import tariff.
Q15. What is the real cost of a transfer relative to a model with no price index effect?
the real cost of the transfer relative to a model with no price index effect, denoted by TR, isTR ≡ ∆Vh ∆Ṽh = 1− Lh Th(σ − 1) ln ( 1− φ+Nφ−Nφ σ0 1− φ+Nφ−Nφ σT ) .
Q16. How much of the cost of the transfer is lower than in the previous scenario?
given the lower manufacturing share in this scenario, the change in the number of Home firms is now larger and as a result, the price index effect can still lower significantly the cost of the transfer, to 92%/35% of its value.
Q17. What is the effect of agglomeration of industrial production on the competitiveness of Chinese?
As the authors show in the next Section, in the presence of traded intermediates, agglomeration of industrial production is not just beneficial for consumers, it also improves the competitiveness of Chinese firms.