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Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade

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  • Rodrigo Adao
  • Arnaud Costinot
  • Dave Donaldson

Abstract

We develop a methodology to construct nonparametric counterfactual predictions, free of functional form restrictions on preferences and technology, in neoclassical models of international trade. First, we establish the equivalence between such models and reduced exchange models in which countries directly exchange factor services. This equivalence implies that, for an arbitrary change in trade costs, counterfactual changes in the factor content of trade, factor prices, and welfare only depend on the shape of a reduced factor demand system. Second, we provide sufficient conditions under which estimates of this system can be recovered nonparametrically. Together, these results offer a strict generalization of the parametric approach used in so-called gravity models. Finally, we use China's recent integration into the world economy to illustrate the feasibility and potential benefits of our approach.

Suggested Citation

  • Rodrigo Adao & Arnaud Costinot & Dave Donaldson, 2017. "Nonparametric Counterfactual Predictions in Neoclassical Models of International Trade," American Economic Review, American Economic Association, vol. 107(3), pages 633-689, March.
  • Handle: RePEc:aea:aecrev:v:107:y:2017:i:3:p:633-89
    Note: DOI: 10.1257/aer.20150956
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    Citations

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    Cited by:

    1. Head, Keith & Mayer, Thierry, 2015. "Brands in Motion: How frictions shape multinational production," CEPR Discussion Papers 10797, C.E.P.R. Discussion Papers.
    2. Nelson Lind & Natalia Ramondo, 2019. "Global Innovation and Knowledge Diffusion," 2019 Meeting Papers 1364, Society for Economic Dynamics.
    3. Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," 2018 Meeting Papers 627, Society for Economic Dynamics.
    4. Wyatt J. Brooks & Pau S. Pujolas, 2018. "Capital accumulation and the welfare gains from trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 491-523, August.
    5. Benjamin Faber & Cecile Gaubert, 2016. "Tourism and Economic Development: Evidence from Mexico's Coastline," NBER Working Papers 22300, National Bureau of Economic Research, Inc.
    6. Bosker, Maarten & Westbrock, Bastian, 2018. "The network origins of the gains from trade," CEPR Discussion Papers 13285, C.E.P.R. Discussion Papers.
    7. repec:aea:aecrev:v:109:y:2019:i:6:p:2245-93 is not listed on IDEAS
    8. Heerman, Kari E. & Sheldon, Ian M., 2018. "Increased economic integration in the Asia-Pacific Region: What might be the potential impact on agricultural trade?," 2018 Annual Meeting, August 5-7, Washington, D.C. 274279, Agricultural and Applied Economics Association.
    9. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    10. Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," NBER Working Papers 24380, National Bureau of Economic Research, Inc.
    11. Rodrigo Adão & Costas Arkolakis & Federico Esposito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," NBER Working Papers 25544, National Bureau of Economic Research, Inc.
    12. Roy Allen, 2019. "Injectivity and the Law of Demand," Papers 1908.05714, arXiv.org.
    13. Simon Fuchs, 2018. "The Spoils of War: Trade Shocks during WWI and Spain’s Regional Development," 2018 Meeting Papers 1172, Society for Economic Dynamics.
    14. Ahmad Lashkaripour & Volodymyr Lugovskyy, 2017. "National Differentiation and Industry-Wide Scale Effects," CAEPR Working Papers 2017-004, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    15. Faber, Benjamin & Gaubert, Cécile, 2018. "Tourism and Economic Development: Evidence from Mexico's Coastline," CEPR Discussion Papers 12644, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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