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Missing Gains from Trade?

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  • Marc J. Melitz
  • Stephen J. Redding

Abstract

In a class of trade models which satisfy a constant elasticity gravity equation, the welfare gains from trade can be computed using the open economy domestic trade share and a constant trade elasticity. The measured welfare gains from trade from this quantitative approach are typically relatively modest. In this paper, we suggest a channel for welfare gains that this quantitative approach typically abstracts from: trade-induced changes in domestic productivity. Using a model of sequential production, in which trade induces a reorganization of production that raises domestic productivity, we show that the welfare gains from trade can become arbitrarily large.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 5 (May)
Pages: 317-21

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:317-21

Note: DOI: 10.1257/aer.104.5.317
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  1. repec:fth:iniesr:430 is not listed on IDEAS
  2. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  3. Su Wang & Jonathan Vogel & Arnaud Costinot, 2011. "An Elementary Theory of Global Supply Chains," 2011 Meeting Papers 95, Society for Economic Dynamics.
  4. Michaels, Guy & Rauch, Ferdinand, 2013. "Resetting the Urban Network: 117-2012," CEPR Discussion Papers 9760, C.E.P.R. Discussion Papers.
  5. Pol Antràs & Davin Chor, 2012. "Organizing the Global Value Chain," NBER Working Papers 18163, National Bureau of Economic Research, Inc.
  6. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
  7. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  8. Kei-Mu Yi, 2010. "Can Multistage Production Explain the Home Bias in Trade?," American Economic Review, American Economic Association, vol. 100(1), pages 364-93, March.
  9. Lorenzo Caliendo & Fernando Parro, 2012. "Estimates of the Trade and Welfare Effects of NAFTA," NBER Working Papers 18508, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bolatto, Stefano & Sbracia, Massimo, 2014. "Deconstructing the Gains from Trade: Selection of Industries vs. Reallocation of Workers," MPRA Paper 56638, University Library of Munich, Germany.

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