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Expansion of Trade at the Extensive Margin: A General Gains-from-Trade Result and Illustrative Examples

  • James R. Markusen

The basic gains-from-trade theorem makes a stark comparison between completely free trade and complete autarky. This paper is motivated by recent evidence that trade has greatly expanded on the extensive margin (aka fragmentation, offshoring) by adding newly traded goods and services and that much of this new trade is in intermediates. I provide an extension of existing gains-from-trade results by allowing trade in an added set of final and/or intermediate goods. As seems generally understood, a sufficient condition for all countries to gain from fragmentation is that the relative world prices of initially-trade goods don't change. However, trade costs break the strict link between domestic and world prices in my approach and this results in interesting subtleties as initially-traded goods change their trade status following fragmentation. I illustrate these results by applying them to two recent and quite specific formulations of expansion at the extensive margin: Grossman and Rossi-Hansberg (2008) and Markusen and Venables (2007). Symmetry in two senses results in gains for all countries: countries are relatively symmetric in size and the newly-traded goods are relatively symmetric in their factor intensities with respect to the world endowment ratio.

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File URL: http://www.nber.org/papers/w15926.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15926.

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Date of creation: Apr 2010
Publication status: published as Markusen, James R., 2013. "Expansion of trade at the extensive margin: A general gains-from-trade result and illustrative examples," Journal of International Economics, Elsevier, vol. 89(1), pages 262-270.
Handle: RePEc:nbr:nberwo:15926
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  1. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  2. Markusen, James R., 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," CEPR Discussion Papers 5408, C.E.P.R. Discussion Papers.
  3. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," Econometric Society 2004 North American Summer Meetings 508, Econometric Society.
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  9. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  10. Venables, Anthony J. & Limao, Nuno, 1999. "Geographical disadvantage - a Heckscher-Ohlin-von Thunen model of international specialization," Policy Research Working Paper Series 2256, The World Bank.
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  13. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc.
  14. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
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  16. Baldwin, Richard & Robert-Nicoud, Frédéric, 2010. "Trade-in-goods and trade-in-tasks: An Integrating Framework," CEPR Discussion Papers 7775, C.E.P.R. Discussion Papers.
  17. Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
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  20. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
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  23. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February.
  24. Timothy J. Kehoe & Kim J. Ruhl, 2013. "How Important Is the New Goods Margin in International Trade?," Journal of Political Economy, University of Chicago Press, vol. 121(2), pages 358-392.
  25. V.N. Balasubramanyam, 2008. "Foreign Direct Investment," Chapters, in: International Handbook of Development Economics, Volumes 1 & 2, chapter 39 Edward Elgar Publishing.
  26. Markusen, James R., 1983. "Factor movements and commodity trade as complements," Journal of International Economics, Elsevier, vol. 14(3-4), pages 341-356, May.
  27. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, March.
  28. Leamer, Edward E, 1987. "Paths of Development in the Three-Factor, n-Good General Equilibrium Model," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 961-999, October.
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