Essays in international trade and economic growth

In Chapter 1, I analyze one of the most striking features of the international economy. This is that wealthy countries are clustered together. This paper empirically explains a mechanism for this clustering by extending the Acemoglu and Ventura model so that it takes real geography into account. Countries close to fast growing economies experience faster growth in aggregate demand for their exports estimulating faster domestic growth. As a result, a poor country that is surrounded by other poor countries finds it more difficult to grow because its terms of trade shift against it. When this model is estimated on data for 1965 to 1985, I find statistically and economically significant effects. If the typical European country were located in Africa these terms of trade effects would have lowered its growth rate by 1 percentage point per year. The results strongly suggest that it is very difficult to raise income in poor countries without dealing with regional problems.Chapter 2 deals with trade balance fluctuations and its origins. International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. I demonstrate the limitations of this approach by showing that idiosyncratic firm level shocks are an important cause of macroeconomic volatility even for large countries. When explaining these fluctuations, standard macroeconomic models generally assume that firms are small and that their microeconomic shocks cancel out. I show that the high degree of concentration of bilateral trade flows means that idiosyncratic shocks can have a significant impact on aggregate economic fluctuations. I theoretically develop a decomposition of the variance of trade flows into its macroeconomic and its microeconomic components. Taking the model to data on bilateral trade flows from 1970 to 1997, I find that the most comprehensive macroeconomic model can only account for at most half of the observed variance in trade account volumes of each country. Thus, this chapter highlights the importance of considering disaggregated data when modelling the current account.In Chapter 3, I analyze the importance of liberalizing the capital account in preparation for a current account liberalization. In the context of a current account liberalization, a significant amount of resource reallocation takes place. Unless the capital account is liberalized, the additional required investment needs to come at the expense of foregone consumption. However, if the capital account is indeed liberalized, financing for the required investment can be obtained in the world markets. This suggests it might be optimal to first liberalize the capital account (at least its long-run side) prior or simultaneously to a trade liberalization. We develop a theoretical model that allows us to analyze the transition from a closed economy to an open economy under these two possible scenarios and confirm these intuitions.