A Theory of Gains from New Imported Inputs

Abstract

This paper analyzes the impact of trade liberalization in an intermediate-good sector on a final-good sector using a general equilibrium model. The model clarifies that the final- and intermediate-good sectors gain from trade through distinct mechanisms. Trade in intermediate-goods leads to tougher competition in the intermediate-good sector, which in turn leads to productivity growth in the sector. Final-good producers benefit from the new entry of foreign suppliers. Moreover, the model shows the economic environment and the channel each sector gains from the most.
JEL Classification: F12, F14, L22