Skill Premium and Trade Puzzles: A Solution Linking Production and Preferences
International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive relationship between skilled-labor intensity in production and income elasticity of demand for several types of preferences, with and without accounting for trade costs and differences in prices. Counter-factual simulations yield a number of results. We can explain about half of “missing trade”, and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.
|Date of creation:||Jun 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cragg, Michael Ian & Epelbaum, Mario, 1996. "Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?," Journal of Development Economics, Elsevier, vol. 51(1), pages 99-116, October.
- Chao, Hung-po & Kim, Sehun & Manne, Alan S., 1982. "Computation of equilibria for nonlinear economies: Two experimental models," Journal of Policy Modeling, Elsevier, vol. 4(1), pages 23-43, March.
- Simonovska, Ina & Waugh, Michael E., 2014.
"The elasticity of trade: Estimates and evidence,"
Journal of International Economics,
Elsevier, vol. 92(1), pages 34-50.
- Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," CESifo Working Paper Series 3356, CESifo Group Munich.
- Ina Simonovska & Michael Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," Working Papers 112, University of California, Davis, Department of Economics.
- Michael Waugh & Ina Simonovska, 2010. "The Elasticity of Trade: Estimates and Evidence," 2010 Meeting Papers 637, Society for Economic Dynamics.
- Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," NBER Working Papers 16796, National Bureau of Economic Research, Inc.
- Fally, Thibault & Paillacar, Rodrigo & Terra, Cristina, 2010.
"Economic geography and wages in Brazil: Evidence from micro-data,"
Journal of Development Economics,
Elsevier, vol. 91(1), pages 155-168, January.
- Thibault Fally & Rodrigo Paillacar & Cristina Terra, 2008. "Economic Geography and Wages in Brazil: Evidence from Micro-Data," THEMA Working Papers 2008-23, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Inmaculada Martínez-Zarzoso & Sebastian Vollmer, 2010. "Bilateral trade flows and income-distribution similarity," Working Papers 10-06, Asociación Española de Economía y Finanzas Internacionales.
- Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
- Jeffrey J. Reimer & Thomas W. Hertel, 2010. "Nonhomothetic Preferences and International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 408-425, 05.
- Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 907-940, August.
- Ina Simonovska, 2009.
"Income Differences and Prices of Tradables,"
2009 Meeting Papers
692, Society for Economic Dynamics.
- Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
- Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
- Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
- Markusen, James R., 2013.
"Putting per-capita income back into trade theory,"
Journal of International Economics,
Elsevier, vol. 90(2), pages 255-265.
- James Cassing & Shuichiro Nishioka, 2009. "Nonhomothetic Tastes and Missing Trade of Factor Services," Working Papers 09-03, Department of Economics, West Virginia University.
- Hanoch, Giora, 1975. "Production and Demand Models with Direct or Indirect Implicit Additivity," Econometrica, Econometric Society, vol. 43(3), pages 395-419, May.
- Attanasio, Orazio & Goldberg, Pinelopi & Pavcnik, Nina, 2003.
"Trade Reforms and Wage Inequality in Colombia,"
CEPR Discussion Papers
4023, C.E.P.R. Discussion Papers.
- Kiminori Matsuyama, 1999.
"A Ricardian Model with a Continuum of Goods under Non-homothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade,"
1241, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
- Hunter, Linda, 1991. "The contribution of nonhomothetic preferences to trade," Journal of International Economics, Elsevier, vol. 30(3-4), pages 345-358, May.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8999. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.