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Missing Gains from Trade?

Listed author(s):
  • Marc J. Melitz
  • Stephen J. Redding

In a class of trade models which satisfy a constant elasticity gravity equation, the welfare gains from trade can be computed using the open economy domestic trade share and a constant trade elasticity. The measured welfare gains from trade from this quantitative approach are typically relatively modest. In this paper, we suggest a channel for welfare gains that this quantitative approach typically abstracts from: trade-induced changes in domestic productivity. Using a model of sequential production, in which trade induces a reorganization of production that raises domestic productivity, we show that the welfare gains from trade can become arbitrarily large.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.5.317
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File URL: http://www.aeaweb.org/aer/ds/10405/P2014_1127_ds.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 104 (2014)
Issue (Month): 5 (May)
Pages: 317-321

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Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:317-21
Note: DOI: 10.1257/aer.104.5.317
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References listed on IDEAS
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  1. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  2. Pol Antràs & Davin Chor, 2012. "Organizing the Global Value Chain," NBER Working Papers 18163, National Bureau of Economic Research, Inc.
  3. Lorenzo Caliendo & Fernando Parro, 2015. "Estimates of the Trade and Welfare Effects of NAFTA," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 1-44.
  4. Ferdinand Rauch, 2015. "Resetting the Urban Network 117-2012," 2015 Meeting Papers 203, Society for Economic Dynamics.
  5. Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 857-880.
  6. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
  7. repec:hhs:iuiwop:430 is not listed on IDEAS
  8. Kei-Mu Yi, 2008. "Can multi-stage production explain the home bias in trade?," Working Papers 08-12, Federal Reserve Bank of Philadelphia, revised 01 Nov 2008.
  9. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  10. Arnaud Costinot & Jonathan Vogel & Su Wang, 2011. "An Elementary Theory of Global Supply Chains," NBER Working Papers 16936, National Bureau of Economic Research, Inc.
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