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On the Heterogeneous Welfare Gains and Losses from Trade

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Abstract

How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences?to generate the documented relationship between tradable expenditure shares, income, and wealth?and uninsurable earnings risk?to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 57 percent larger than those in the highest wealth decile.

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  • Daniel R. Carroll & Sewon Hur, 2019. "On the Heterogeneous Welfare Gains and Losses from Trade," Working Papers 19-06R2, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:190602
    DOI: 10.26509/frbc-wp-201906r2
    Note: First version March 2019. Second version July 2019
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    1. On the Heterogeneous Welfare Gains and Losses from Trade
      by Christian Zimmermann in NEP-DGE blog on 2019-11-15 02:09:41

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    4. Xavier Jaravel & Erick Sager, 2019. "What are the price effects of trade? Evidence from the US and implications for quantitative trade models," CEP Discussion Papers dp1642, Centre for Economic Performance, LSE.
    5. Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 20-18R, Federal Reserve Bank of Cleveland, revised 15 Feb 2022.
    6. Ma, Yong & Chen, Diandian, 2020. "Openness, rural-urban inequality, and happiness in China," Economic Systems, Elsevier, vol. 44(4).
    7. Hottman, Colin J. & Monarch, Ryan, 2020. "A matter of taste: Estimating import price inflation across U.S. income groups," Journal of International Economics, Elsevier, vol. 127(C).
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    10. Handbury, Jessie, 2020. "Comment on “On the Heterogeneous Welfare Gains and Losses from Trade” by Daniel Carroll and Sewon Hur," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 17-19.

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    More about this item

    Keywords

    consumption; trade gains; inequality;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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