Essays in International Economics

Abstract

This dissertation consists of three essays. In Chapter 1, I ask which mechanisms are quantitatively important for understanding the process of structural change. I build a model combining four forces: (i) sector-biased technological progress, (ii) nonhomothetic tastes, (iii) international trade and (iv) changing wedges between factor costs across sectors. I calibrate the model using the data for 45 diverse countries over the period 1970-2005 and use counterfactual simulations of the model to assess the relative importance of the four forces. I find that sector-biased technological change is overall the most important mechanism and it is essential for understanding experiences of developed countries. Nonhomothetic preferences are key to accounting for movement of labor out of agriculture which matters primarily for poorer countries. Trade and intersectoral wedges are important for individual countries but their impact on the relocation of labor is less systematic.

How large are the welfare gains from trade when factors are misallocated due to domestic distortions? In Chapter 2, I provide an answer to this question by interpreting the wedges in the model from Chapter 1 as representing distortions to the allocation of labor across sectors. I show theoretically how the expression for the gains from trade in a frictionless model should be adjusted in the presence of intersectoral distortions. Empirically, I find that the gains from trade for net exporters of agricultural goods are overstated in models that abstract from intersectoral distortions since in those countries trade tends to exacerbate the effect of domestic frictions.

In Chapter 3, I study the effects of credit constraints on aggregate outcomes and wealth distribution in closed and open economies. Entrepreneurs, who are heterogeneous in ability and wealth, might encounter collateral constraints as an obstacle to building businesses of optimal size. In the open economy entrepreneurs can decide to enter a foreign market, possibly subject to paying a fixed cost. The main finding is that the the negative impact of credit frictions is relatively larger in open economies when entering the foreign market is costly. Stated differently, credit frictions lower the welfare gains from trade if they prevent some entrepreneurs from exporting.