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Expansion of Trade at the Extensive Margin: A General Gains-from-Trade Result and Illustrative Examples

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  • Markusen, James R.

Abstract

The basic gains-from-trade theorem makes a stark comparison between completely free trade and complete autarky. This paper is motivated by recent evidence that trade has greatly expanded on the extensive margin (aka fragmentation, offshoring) by adding newly traded goods and services and that much of this new trade is in intermediates. I provide an extension of existing gains-from-trade results by allowing trade in an added set of final and/or intermediate goods. As seems generally understood, a sufficient condition for all countries to gain from fragmentation is that the relative world prices of initially-trade goods don't change. However, trade costs break the strict link between domestic and world prices in my approach and this results in interesting subtleties as initially-traded goods change their trade status following fragmentation. I illustrate these results by applying them to two recent and quite specific formulations of expansion at the extensive margin: Grossman and Rossi-Hansberg (2008) and Markusen and Venables (2007). Symmetry in two senses results in gains for all countries: countries are relatively symmetric in size and the newly-traded goods are relatively symmetric in their factor intensities with respect to the world endowment ratio.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7802.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7802

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Related research

Keywords: extensive margin; fragmentation; offshoring; trade in tasks; vertical specialization;

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References

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  1. Hanson, G.H., 1999. "`Market Potential, Increasing Returns, and Geographic Concentration," Working Papers 439, Research Seminar in International Economics, University of Michigan.
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Cited by:
  1. Kemal Türkcan, 2014. "Investigating the Role of Extensive Margin, Intensive Margin, Price and Quantity Components on Turkey’s Export Growth during 1998-2011," Working Papers 2014/2, Turkish Economic Association.
  2. Coughlin, Cletus C., 2014. "Determinants of trade margins: insights using state export data," Working Papers 2014-6, Federal Reserve Bank of St. Louis.
  3. Kohler, Wilhelm & Wrona, Jens, 2011. "Offshoring tasks, yet creating jobs?," University of Tuebingen Working Papers in Economics and Finance 12, University of Tuebingen, Faculty of Economics and Social Sciences.
  4. Cletus C. Coughlin, 2012. "Extensive and intensive trade margins: a state-by-state view," Working Papers 2012-002, Federal Reserve Bank of St. Louis.

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