Ricardian Productivity Differences and the Gains from Trade
AbstractThis paper evaluates the role of sectoral heterogeneity in determining the gains from trade. We first show analytically that in the presence of sectoral Ricardian comparative advantage, a one -sector sufficient statistic formula that uses total trade volumes as a share of total absorption systematically understates the true gains from trade. Greater relative sectoral productivity differences lead to larger disparities between the gains implied by the one-sector formula and the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries and 19 sectors we show that the multi-sector formula implies on average 30% higher gains from trade than the one-sector formula, and as much as 100% higher gains for some countries. We then set up and estimate a quantitative Ricardian-Heckscher-Ohlin model in which no version of the formula applies exactly, and compare a range of sufficient statistic formulas to the true gains in this model. Confirming the earlier results, formulas that do not take into account sectoral heterogeneity understate the true gains from trade in the model by as much as two-thirds. The one-sector formulas understate the gains by more in countries with greater dispersion in sectoral productivities.
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Bibliographic InfoPaper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 633.
Length: 39 pages
Date of creation: 19 Dec 2012
Date of revision:
gains from trade; comparative advantage; sufficient statistics;
Other versions of this item:
- Levchenko, Andrei A. & Zhang, Jing, 2014. "Ricardian productivity differences and the gains from trade," European Economic Review, Elsevier, vol. 65(C), pages 45-65.
- Andrei A. Levchenko & Jing Zhang, 2013. "Ricardian Productivity Differences and the Gains from Trade," NBER Working Papers 19641, National Bureau of Economic Research, Inc.
- F10 - International Economics - - Trade - - - General
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
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- Michael E. Waugh, 2009.
"International trade and income differences,"
435, Federal Reserve Bank of Minneapolis.
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