First, a model of horizontally and vertically integrated firms is developed. These firms are then embedded in a general equilibrium model of trading countries. It is shown how multinational corporations emerge as a result of differences across countries in factor compositions. Intersectoral, intraindustry, and intrafirm trade can coexist, and intrafirm trade takes place in invisibles (headquarter services) and intermediate inputs. It is shown how the various trade components depend on the structure of the world economy. The model predicts trade patterns which are close to observed trade patterns.

Budget deficits implying an unbounded present value of government debt are infeasible and, hence, induce expectations of a future policy change. The authors study how expectations of a policy switch, whose timing or mix between expenditure cuts, tax increases, or increases in money growth rates may be uncertain, affect economic dynamics before the switch takes place. They are especially concerned with the correlation between changes in the deficit and inflation. Of particular interest is their finding that timing uncertainty may induce fluctuations in the rate of inflation that seem to be unrelated to the budget deficit, at a time when the budget deficit is responsible for inflation.

We characterize trade policies that result from political competition when assessments of well-being include both material and psychosocial components. The material component reflects, as usual, satisfaction from consumption. Borrowing from social identity theory, we take the psychosocial component as combining the pride and self-esteem an individual draws from the status of groups with which she identifies and a dissonance cost she bears from identifying with those that are different from herself. In this framework, changes in social identification patterns that may result, for example, from increased income inequality or heightened class or ethnic tensions, lead to pronounced changes in trade policy. We analyse the nature of these policy changes.

We study the determinants of the location of subcontracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs and the nature of the contracting environment in each country.

We study the competition between two political parties for seats in a legislature. The parties have fixed positions on some issues, but vary their positions on others in order to attract votes and campaign contributions. In this context, we examine whether special interest groups are governed by an electoral motive or an influence in their campaign giving, and how their contributions affect the equilibrium platforms. We show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups. The party that is expected to win a majority of seats caters more to the special interests.

We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder.

We study a two-country two-sector model of international trade in which one sector produces homogeneous products while the other produces differentiated products. The differentiated-product industry has firm heterogeneity, monopolistic competition, search and matching in its labor market, and wage bargaining. Some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labor markets. We study the interaction of labor market rigidities and trade impediments in shaping welfare, trade flows, productivity, price levels and unemployment rates. We show that both countries gain from trade but that the flexible country -- which has lower labor market frictions -- gains proportionately more. A flexible labor market confers comparative advantage; the flexible country exports differentiated products on net. A country benefits by lowering frictions in its labor market, but this harms the country's trade partner. And the simultaneous proportional lowering of labor market frictions in both countries benefits both of them. The model generates rich patterns of unemployment. Specifically, trade integration -- which benefits both countries -- may raise their rates of unemployment. Moreover, differences in rates of unemployment do not necessarily reflect differences in labor market rigidities; the rate of unemployment can be higher or lower in the flexible country. Finally, we show that the flexible country has both higher total factor productivity and a lower price level, which operates against the standard Balassa-Samuelson effect.

Elhanan Helpman, Assaf Razin; Uncertainty and International Trade in the Presence of Stock Markets, The Review of Economic Studies, Volume 45, Issue 2, 1 June 1

M. June Flanders, Elhanan Helpman; An Optimal Exchange Rate Peg in a World of General Floating, The Review of Economic Studies, Volume 46, Issue 3, 1 July

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer–employee data for Brazil, we show that much of overall wage inequality arises within sector–occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman et al. (2010) and estimate it with Brazilian data. We show that the estimated model provides a close approximation to the observed distribution of wages and employment. We use the estimated model to undertake counterfactuals, in which we find sizable effects of trade on wage inequality.