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Deconstructing the Gains from Trade: Selection of Industries vs. Reallocation of Workers

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  • Bolatto, Stefano
  • Sbracia, Massimo

Abstract

In a Ricardian model with CES preferences and general distributions of industry efficiencies, the sources of the welfare gains from trade can be precisely decomposed into a selection and a reallocation effect. The former is the change in average efficiency due to the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries in domestic production, due the reallocation of workers away from less-efficient non-exporting industries. This decomposition, which is hard to calculate in the general case, simplifies dramatically if industry efficiencies are Fréchet distributed, providing easy-to-quantify model-based measures of these two effects. Under this assumption, we also show that when the gains from trade are small, it is the selection effect that matters most; as the gains from trade rise and the size of the export sector grows, so does the importance of the reallocation effect.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:56638
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    1. Stefano Bolatto, "undated". "Trade across Countries and Manufacturing Sectors with Heterogeneous Trade Elasticities," Development Working Papers 360, Centro Studi Luca d'Agliano, University of Milano.

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    More about this item

    Keywords

    comparative advantage; selection effect; reallocation effect;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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