Jonathan Eaton, Gene M. Grossman, William H. Kaempfer, Edward Tower; The Impact of Monopoly Pricing on the Lerner Symmetry Theorem: A Comment*, The Quarter

We develop a dynamic multicountry general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multisector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during the period 2008–2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, accounts for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles. (JEL E3, F1, F4)

This paper examines product selection by multi-product firms, taking explicit account of the sequential nature of real decisions: firms choose product lines before the quantity or price rivalry with other firms is resolved. Unlike most previous work, we focus on demand side strategic considerations rather than cost side. We find close substitutes produced by the same firm is a natural outcome, in contrast to conventional wisdom.

We reconcile trade theory with plant-level export behavior, extending the Ricardian model to accommodate many countries, geographic barriers, and imperfect competition. Our model captures qualitatively basic facts about U.S. plants: (i) productivity dispersion, (ii) higher productivity among exporters, (iii) the small fraction who export, (iv) the small fraction earned from exports among exporting plants, and (v) the size advantage of exporters. Fitting the model to bilateral trade among the United States and 46 major trade partners, we examine the impact of globalization and dollar appreciation on productivity, plant entry and exit, and labor turnover in U.S. manufacturing.