Unemployment in an Interdependent World



2 Model Setup

Our world consists of N potentially asymmetric countries, indexed by subscript i, with
i = 1, ..., N. Countries have work forces denoted by L
i and labor is the only factor of
production. Firms differ with respect to their productivity level
φ as in Melitz (2003).
The labor market features search and matching frictions as in Mortensen and Pissarides
(1994). Our framework generalizes Felbermayr, Prat, and Schmerer (2008) to asymmetries
regarding country size, geographical location, and labor market institutions.

2.1 Demand for intermediate inputs

Similar to Egger and Kreickemeier (2009) and Felbermayr, Prat, and Schmerer (2008),
in each country firms produce a final output good Q under perfect competition. That
good is assembled from a continuum of intermediate inputs, indexed by ω, and supplied
by domestic and foreign firms who operate under conditions of monopolistic competition.
The final output good can be consumed or used by input producers. The aggregate
production function in country i is

σ

Qi =


{(Mli)ν-1 [   q[ω]σ-1 dω{    ,

(1)


ωΩi

where q [ω] denotes the quantity of intermediate input ω, and σ > 1 is the elasticity of
substitution between any two varieties. The set of available intermediate inputs in country
i, Ωi, has measure MMi. The parameter ν (0,1) governs the extent of external economies
of scale
:8 If ν = 0 the number of available varieties is irrelevant for total output. If
ν = 1 we obtain the case discussed by Krugman (1980) or Melitz (2003). The price index
corresponding to (1) is given by:

Pi=( MM- L,     σ )1i ■                  (2)

where p[ω] is the price of a variety ω. We choose the price index of country one as the
num´eraire, i.e., P
1 = 1.

Similar to Melitz (2003), intermediate input firms are uniquely described by different
productivity levels
φ and place of origin, so that we can substitute the firm index ω with
φ and index prices and quantities with country subscripts denoting place of origin and
destination. Due to flow fixed costs, not all firms find it optimal to serve all markets.
Serving foreign customers in country j from country i entails iceberg trade costs τ
ij1
(with τ
ii = 1 and τ ij = τ ji ) for all i and j. Hence, an intermediate goods producer in

8See, e.g., Blanchard and Giavazzi (2003) or Egger and Kreickemeier (2008b), where ν = 0; and
Felbermayr, Prat, and Schmerer (2008) where v
[0, 1].



More intriguing information

1. What Drives the Productive Efficiency of a Firm?: The Importance of Industry, Location, R&D, and Size
2. Developing vocational practice in the jewelry sector through the incubation of a new ‘project-object’
3. The name is absent
4. The bank lending channel of monetary policy: identification and estimation using Portuguese micro bank data
5. Gender stereotyping and wage discrimination among Italian graduates
6. Banking Supervision in Integrated Financial Markets: Implications for the EU
7. 5th and 8th grade pupils’ and teachers’ perceptions of the relationships between teaching methods, classroom ethos, and positive affective attitudes towards learning mathematics in Japan
8. The name is absent
9. Optimal Tax Policy when Firms are Internationally Mobile
10. Regional differentiation in the Russian federation: A cluster-based typification
11. The name is absent
12. The name is absent
13. Short report "About a rare cause of primary hyperparathyroidism"
14. Determinants of U.S. Textile and Apparel Import Trade
15. The name is absent
16. AN EMPIRICAL INVESTIGATION OF THE PRODUCTION EFFECTS OF ADOPTING GM SEED TECHNOLOGY: THE CASE OF FARMERS IN ARGENTINA
17. Stillbirth in a Tertiary Care Referral Hospital in North Bengal - A Review of Causes, Risk Factors and Prevention Strategies
18. Demographic Features, Beliefs And Socio-Psychological Impact Of Acne Vulgaris Among Its Sufferers In Two Towns In Nigeria
19. A Duality Approach to Testing the Economic Behaviour of Dairy-Marketing Co-operatives: The Case of Ireland
20. The name is absent