Skill Premium and Trade Puzzles: a Solution Linking Production and Preferences
AbstractInternational trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive relationship between skilled-labor intensity in production and income elasticity of demand for several types of preferences, with and without accounting for trade costs and differences in prices. Counter-factual simulations yield a number of results. We can explain about half of “missing trade”, and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18131.
Date of creation: Jun 2012
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Other versions of this item:
- Caron, Justin & Fally, Thibault & Markusen, James R., 2012. "Skill Premium and Trade Puzzles: A Solution Linking Production and Preferences," CEPR Discussion Papers 8999, C.E.P.R. Discussion Papers.
- F10 - International Economics - - Trade - - - General
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
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- Markusen, James R., 2012.
"Per-Capita Income as a Determinant of International Trade and Environmental Policies,"
2013-06, Graduate School of Economics, Hitotsubashi University.
- James R. Markusen, 2013. "Per-capita Income as a Determinant of International Trade and Environmental Policies," NBER Working Papers 19754, National Bureau of Economic Research, Inc.
- Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
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