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Improving the resilience of the economy in the face of uncertain climate change damages involves irreversible investments to scale up new technologies that are less vulnerable to the effects of climate change. The benefit of having such options includes the avoided welfare cost of diverting consumption to scaling up the new technology after production possibilities have been diminished by climate change impacts. This needs to be balanced against the upfront cost of scaling up a technology that is potentially less productive than incumbent technologies. The paper uses a real options approach to investigate this trade-off, based on numerical simulation of a multi-period model of economic growth and climate change impacts that includes a one-time cost associated with scaling up the alternative technology. The value of the option provided by investment in the more resilient technology depends on the ex-ante volatility of climate change damages, as well as how rapidly climate change degrades the productivity of the economy's established technology. In addition, the size of scale-up cost that leaves the economy indifferent between investing and not investing in the new technology can be used to define the value of early investment in the less climate change-vulnerable technology as a sort of call option.

Climate Change Resilience --- Environment and Development --- Increasing Returns --- Option Value --- Uncertainty

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Economies of scale --- -Single market programme --- 338.5 --- Economies of size --- Increasing returns --- Scale, Economies of --- Size, Economies of --- Big business --- Costs, Industrial --- Diminishing returns

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This paper examines the effects of trade on growth among Central America-Dominican Republic Free Trade Agreement countries. To accomplish this task, the authors collected a panel data set of 136 countries over 1960-2010, and estimated cross-country growth regressions using an econometric methodology that accounts for unobserved effects and the likely endogeneity of the growth determinants. Following recent empirical efforts, they tested whether the impact of trade openness on growth may be more effective after surpassing a "minimum threshold" in specific areas closely related to economic development. The analysis finds not only that there is a robust causal link from trade to growth, but also that the growth benefits from trade are larger in countries with higher levels of education and innovation, deeper financial markets, a stronger institutional framework, more developed infrastructure networks, a high level of integration with world capital markets, and less stringent economic regulations. On average, rising trade has benefited growth in Central America-Dominican Republic Free Trade Agreement countries. However, the lack of progress in structural reforms has not allowed these countries to maximize the potential benefits from trade.

Achieving Shared Growth --- Benchmark --- Capital markets --- Comparative advantage --- Comparative advantages --- Economic growth --- Economic implications --- Economic integration --- Economic Theory & Research --- Economies of scale --- Emerging Markets --- Exports --- Free Trade --- GDP --- Human capital --- Increasing returns --- Increasing returns to scale --- International Economics and Trade --- International trade --- Macroeconomics and Economic Growth --- Poverty Reduction --- Private Sector Development --- Productivity --- Regression analysis --- Regulatory framework --- Statistical analysis --- Trade Policy

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The differences in financial systems between industrial and developing countries are pronounced. It has been observed, both theoretically and empirically, that the differences in countries' financial systems are a source of comparative advantage in trade. Do and Levchenko point out that to the extent a country's financial development is endogenous, it will in turn be influenced by trade. They build a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: in countries with large financially intensive sectors, financial systems are more developed. When a wealthy and a poor country open to trade, the financially dependent sectors grow in the wealthy country, and so does the financial system. By contrast, as the financially intensive sectors shrink in the poor country, demand for external finance decreases and the domestic financial system deteriorates. The authors test their model using data on financial development for a sample of 77 countries. They find that the main predictions of the model are borne out in the data: trade openness is associated with faster financial development in wealthier countries, and with slower financial development in poorer ones. This paper-a product of the Development Research Group-is part of a larger effort in the group to investigate the relation between finance and trade.

Comparative Advantage --- Cred Development --- Debt Markets --- Economic Theory and Research --- Economy --- Emerging Markets --- Equilibrium --- Finance and Financial Sector Development --- Financial Sector --- GDP --- Goods --- Income --- Increasing Returns --- Increasing Returns To Scale --- International Trade --- Liquidity --- Macroeconomics and Economic Growth --- Markets --- Positive Externality --- Private Sector Development --- Production --- Property Rights --- Total Output --- Trade --- Wealth

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Production networks have been at the heart of the recent growth in trade among East Asian countries. Fragmentation trade, reflected mainly in the trade in parts and components, is expanding more rapidly than the conventional trade in final goods. This is mainly due to the relatively more favorable policy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibiting increasing returns to scale. The economic integration of China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for international specialization. International production fragmentation in East Asia has intensified intraregional trade but has depended heavily on extraregional trade in final goods. While production networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have not automatically led to technology spillovers and have led to an extreme interdependence across East Asian countries.

Capital --- Costs --- Development --- Economic Growth --- Economic Integration --- Economic Theory and Research --- Emerging Markets --- Exports --- Free Trade --- Goods --- Income --- Increasing Returns --- Increasing Returns To Scale --- Industrialization --- Industry --- Inputs --- International Economics & Trade --- Law and Development --- Macroeconomics and Economic Growth --- Organizational Capital --- Patents --- Private Sector Development --- Production --- Production Costs --- Public Sector Development --- Technology Industry --- Trade --- Trade Barriers --- Trade Law --- Trade Liberalization --- Trade Policy --- Wage Differentials