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Trade, Diffusion and the Gains from Openness

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  • Andres Rodriguez-Clare

Abstract

Building on Eaton and Kortum's (2002) model of Ricardian trade, Alvarez and Lucas (2005) calculate that a small country representing 1% of the world's GDP experiences a gain of 41% as it goes from autarky to frictionless trade with the rest of the world. But the gains from openness, which includes not only trade but all the other ways through which countries interact, are arguably much higher than the gains from trade. This paper presents and then calibrates a model where countries interact through trade as well as diffusion of ideas, and then quantifies the overall gains from openness and the role of trade in generating these gains. Having the model match the trade data (i.e., the gravity equation) and the observed growth rate is critical for this quantification to be reasonable. The main result of the paper is that, compared to the model without diffusion, the gains from openness are much larger (206%-240%) and the gains from trade are smaller (13%-24%) when diffusion is included in the model. This last result is a consequence of a novel feature of the model, namely that trade and diffusion are substitutes, implying that trade generates smaller gains when diffusion is present.

Suggested Citation

  • Andres Rodriguez-Clare, 2007. "Trade, Diffusion and the Gains from Openness," NBER Working Papers 13662, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13662
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Trejos, Alberto & Ferreira, Pedro Cavalcanti, 2008. "Trade in intermediate goods and total factor productivity," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 676, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    2. Dasgupta, Kunal, 2012. "Learning and knowledge diffusion in a global economy," Journal of International Economics, Elsevier, vol. 87(2), pages 323-336.
    3. Pedro Cavalcanti Ferreira & Alberto Trejos, 2011. "Gains from Trade and Measured Total Factor Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 496-510, July.
    4. Pedro Cavalcanti Ferreira & Alberto Trejos, 2008. "Trade in intermediate goods and total factor productivity," Working Papers 08_18, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    5. Kunal Dasgupta, 2009. "Learning, Knowledge Diffusion and the Gains from Globalization," Working Papers tecipa-364, University of Toronto, Department of Economics.
    6. Bogmans, C.W.J., 2011. "Can globalization outweigh free-riding?," Serie Research Memoranda 0048, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    7. Ferreira, Pedro Cavalcanti & Trejos, Alberto, 2010. "Gains from trade and measured total factor productivity," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 711, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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