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Internal Trade, Productivity, and Interconnected Industries: A Quantitative Analysis

Listed author(s):
  • Trevor Tombe

    (University of Calgary)

  • Lukas Albrecht

Does trade within a country affect welfare and productivity? What are the magnitude and consequences of costs to such trade? To answer these questions, we exploit unique Canadian data to measure internal trade costs in a variety of ways -- they are large, and vary across sectors and provinces. To quantify their consequences for welfare and productivity, we use a recent multi-sector trade model featuring rich input-output relationships. We find inter-provincial trade is an important contributor to Canada's GDP and welfare, though there are significant costs to such trade. Reducing inter-provincial trade costs by 10% yields aggregate gains of 0.9%; eliminating our preferred estimates of costs, gains average between 3-7% -- equivalent to real GDP gains between $50-$130 billion. Finally, as policy reforms are often sector-specific, we liberalize sectors one at a time and find gains are largest in highly interconnected industries.

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File URL: http://econ.ucalgary.ca/sites/econ.ucalgary.ca.manageprofile/files/unitis/publications/1-6131374/albrecht_tombe_2015_final.pdf
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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2015-05.

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Length: 38
Date of creation:
Date of revision: 04 Feb 2017
Handle: RePEc:clg:wpaper:2015-05
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  1. Russell Hillberry & David Hummels, 2003. "Intranational Home Bias: Some Explanations," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1089-1092, November.
  2. Sandra Poncet, 2005. "A Fragmented China: Measure and Determinants of Chinese Domestic Market Disintegration," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 409-430, 08.
  3. Vasco M. Carvalho & Xavier Gabaix, 2010. "The Great Diversification and its Undoing," NBER Working Papers 16424, National Bureau of Economic Research, Inc.
  4. 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.
  5. Charles R. Hulten, 1978. "Growth Accounting with Intermediate Inputs," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 511-518.
  6. Trevor Tombe & Jennifer Winter, "undated". "Fiscal Integration with Internal Trade: Quantifying the Effects of Equalizing Transfers," Working Papers 2013-28, Department of Economics, University of Calgary, revised 04 Feb 2017.
  7. Chen, Natalie, 2002. "Intra-national versus International Trade in the European Union: Why do National Borders Matter?," CEPR Discussion Papers 3407, C.E.P.R. Discussion Papers.
  8. Yilmazkuday, Hakan, 2009. "Understanding Interstate Trade Patterns," MPRA Paper 15952, University Library of Munich, Germany.
  9. Han QI & Haichao Fan & Edwin Lai, 2013. "Global Gains from Reduction of Trade Costs," 2013 Meeting Papers 1283, Society for Economic Dynamics.
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