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Development Accounting and International Trade

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  • Hirokazu Ishise

Abstract

Development accounting shows that a significant part of cross-country income differences is attributed to differences in total factor productivity (TFP), but the sources of TFP differences are not well understood. This paper considers the role of international trade to explain cross-country income differences in TFP. By using a multi-country Ricardian trade model, I distinguish trade costs and trade policy factors from a pure technology factor in TFP. Under the baseline parameterization, my model shows that conventional TFP measures overestimate fundamental productivity differences by 30%. I then show that trade costs significantly influence welfare: small European countries enjoy 10-15% higher welfare through their proximity to larger and more productive neighboring countries, while Oceanian and countries in southern Africa suffer from 10-20% lower welfare due to their remoteness. Trade policy also has impacts: tariffs decrease welfare by 1-10%, while free-trade agreements increase welfare by 1-5%. These gains from trade are considerably smaller if general equilibrium effects are not considered.

Suggested Citation

  • Hirokazu Ishise, 2015. "Development Accounting and International Trade," ISER Discussion Paper 0944, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0944
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2015/DP0944.pdf
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
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    3. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
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    5. Fernando E. Alvarez & Francisco J. Buera & Robert E. Lucas, Jr., 2013. "Idea Flows, Economic Growth, and Trade," NBER Working Papers 19667, National Bureau of Economic Research, Inc.
    6. 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.
    7. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, vol. 97(3), pages 562-585, June.
    8. Baxter, Marianne, 1992. "Fiscal Policy, Specialization, and Trade in the Two-Sector Model: The Return of Ricardo?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 713-744, August.
    9. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael, 2014. "Price equalization, trade flows, and barriers to trade," European Economic Review, Elsevier, vol. 70(C), pages 383-398.
    10. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
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