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Trade, Diffusion and the Gains from Openness

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  • Andres Rodriguez-Clare

Abstract

Building on Eaton and Kortum's (2002) model of Ricardian trade, Alvarez and Lucas (2005) calculate that a small country representing 1% of the world's GDP experiences a gain of 41% as it goes from autarky to frictionless trade with the rest of the world. But the gains from openness, which includes not only trade but all the other ways through which countries interact, are arguably much higher than the gains from trade. This paper presents and then calibrates a model where countries interact through trade as well as diffusion of ideas, and then quantifies the overall gains from openness and the role of trade in generating these gains. Having the model match the trade data (i.e., the gravity equation) and the observed growth rate is critical for this quantification to be reasonable. The main result of the paper is that, compared to the model without diffusion, the gains from openness are much larger (206%-240%) and the gains from trade are smaller (13%-24%) when diffusion is included in the model. This last result is a consequence of a novel feature of the model, namely that trade and diffusion are substitutes, implying that trade generates smaller gains when diffusion is present.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13662.

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Date of creation: Dec 2007
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Handle: RePEc:nbr:nberwo:13662

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  1. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
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  7. Rose, Andrew K, 2005. "Size Really Doesn't Matter: In Search of a National Scale Effect," CEPR Discussion Papers 5350, C.E.P.R. Discussion Papers.
  8. Aitken, Brian & Hanson, Gordon H. & Harrison, Ann E., 1997. "Spillovers, foreign investment, and export behavior," Journal of International Economics, Elsevier, vol. 43(1-2), pages 103-132, August.
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  15. Keller, W., 1996. "Are International R&D Spillovers Trade-Related? Analyzing Spillovers Among Randomly Matched Trade Partners," Working papers 9607, Wisconsin Madison - Social Systems.
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  18. Mary Hallward-Driemeier & Giuseppe Iarossi & Kenneth L. Sokoloff, 2002. "Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-Level Data," NBER Working Papers 8894, National Bureau of Economic Research, Inc.
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  20. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
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Cited by:
  1. Dasgupta, Kunal, 2012. "Learning and knowledge diffusion in a global economy," Journal of International Economics, Elsevier, vol. 87(2), pages 323-336.
  2. Pedro Cavalcanti Ferreira & Alberto Trejos, 2011. "Gains from Trade and Measured Total Factor Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 496-510, July.
  3. Kunal Dasgupta, 2009. "Learning, Knowledge Diffusion and the Gains from Globalization," Working Papers tecipa-364, University of Toronto, Department of Economics.
  4. Pedro Cavalcanti Ferreira & Alberto Trejos, 2008. "Trade in intermediate goods and total factor productivity," Working Papers 08_18, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  5. Ferreira, Pedro Cavalcanti & Trejos, Alberto, 2010. "Gains from trade and measured total factor productivity," Economics Working Papers (Ensaios Economicos da EPGE) 711, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Trejos, Alberto & Ferreira, Pedro Cavalcanti Gomes, 2008. "Trade in intermediate goods and total factor productivity," Economics Working Papers (Ensaios Economicos da EPGE) 676, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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