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Missing Gains from Trade?

Author

Listed:
  • Marc J. Melitz
  • Stephen J. Redding

Abstract

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.

Suggested Citation

  • Marc J. Melitz & Stephen J. Redding, 2014. "Missing Gains from Trade?," American Economic Review, American Economic Association, vol. 104(5), pages 317-321, May.
  • 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. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
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    3. Michaels, Guy & Rauch, Ferdinand, 2013. "Resetting the Urban Network: 117-2012," CEPR Discussion Papers 9760, C.E.P.R. Discussion Papers.
    4. Arnaud Costinot & Jonathan Vogel & Su Wang, 2013. "An Elementary Theory of Global Supply Chains," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 109-144.
    5. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, pages 52-102.
    6. 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.
    7. Kei-Mu Yi, 2010. "Can Multistage Production Explain the Home Bias in Trade?," American Economic Review, American Economic Association, vol. 100(1), pages 364-393, March.
    8. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    9. repec:hhs:iuiwop:430 is not listed on IDEAS
    10. 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.
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    Citations

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    Cited by:

    1. Pinelopi K. Goldberg & Nina Pavcnik, 2016. "The Effects of Trade Policy," NBER Working Papers 21957, National Bureau of Economic Research, Inc.
    2. Foellmi, Reto & Legge, Stefan & Tiemann, Alexa, 2015. "Innovation and Trade in the Presence of Credit Constraints," CEPR Discussion Papers 10391, C.E.P.R. Discussion Papers.
    3. Olper, Alessandro & Pacca, Lucia & Curzi, Daniele, 2014. "Trade, import competition and productivity growth in the food industry," Food Policy, Elsevier, vol. 49(P1), pages 71-83.
    4. repec:eee:reveco:v:51:y:2017:i:c:p:645-659 is not listed on IDEAS
    5. Ebell, Monique & Hurst, Ian & Warren, James, 2016. "Modelling the long-run economic impact of leaving the European Union," Economic Modelling, Elsevier, pages 196-209.
    6. Stefano Bolatto & Massimo Sbracia, 2016. "Deconstructing the Gains from Trade: Selection of Industries vs Reallocation of Workers," Review of International Economics, Wiley Blackwell, vol. 24(2), pages 344-363, May.
    7. Marti, Josep & Alguacil, Maite & Orts, Vicente, 2015. "Firm Heterogeneity and Location Choice of European Multinationals," MPRA Paper 62596, University Library of Munich, Germany.
    8. Christian Rutzer, 2014. "A Theory of Trade Liberalization and Innovations with Heterogeneous Firms," Working papers 2014/02, Faculty of Business and Economics - University of Basel.
    9. Patrick Alexander, 2016. "Producer Heterogeneity, Value-Added, and International Trade," Staff Working Papers 16-54, Bank of Canada.
    10. Guzman Ourens, 2017. "The long-term impact of trade with firm heterogeneity," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2017004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    11. Heid, Benedikt & Larch, Mario, 2016. "Gravity with unemployment," Journal of International Economics, Elsevier, pages 70-85.

    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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