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Skill Premium and Trade Puzzles: a Solution Linking Production and Preferences

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  • Justin Caron
  • Thibault Fally
  • James R. Markusen

Abstract

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.

Suggested Citation

  • Justin Caron & Thibault Fally & James R. Markusen, 2012. "Skill Premium and Trade Puzzles: a Solution Linking Production and Preferences," NBER Working Papers 18131, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18131
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    Cited by:

    1. Ariu, Andrea, 2016. "Crisis-proof services: Why trade in services did not suffer during the 2008–2009 collapse," Journal of International Economics, Elsevier, vol. 98(C), pages 138-149.
    2. Markusen, James R., 2012. "Per-Capita Income as a Determinant of International Trade and Environmental Policies," Discussion Papers 2013-06, Graduate School of Economics, Hitotsubashi University.
    3. Pablo D. Fajgelbaum & Amit K. Khandelwal, 2016. "Measuring the Unequal Gains from Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1113-1180.
    4. Peter Egger & Michael Pfaffermayr, 2016. "A generalized spatial error components model for gravity equations," Empirical Economics, Springer, vol. 50(1), pages 177-195, February.
    5. James R. Markusen, 2014. "Per-Capital Income as a Determinant of International Trade and Environment Policies," CESifo Working Paper Series 4618, CESifo Group Munich.
    6. Caron, Justin & Fally, Thibault & Markusen, James, 2017. "Per Capita Income and the Demand for Skills," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt96g8f3k0, Department of Agricultural & Resource Economics, UC Berkeley.
    7. Daniela MAGGIONI & Alessia LO TURCO & Mauro GALLEGATI, 2014. "Does export complexity matter for firms' output volatility?," Working Papers 407, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    8. Markusen, James R., 2013. "Putting per-capita income back into trade theory," Journal of International Economics, Elsevier, vol. 90(2), pages 255-265.
    9. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 115, Department of Economics - University of Zurich.
    10. David Atkin & Benjamin Faber & Marco Gonzalez-Navarro, 2015. "Retail Globalization and Household Welfare: Evidence from Mexico," CEP Discussion Papers dp1351, Centre for Economic Performance, LSE.

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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