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Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale

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  • Konstantin Kucheryavyy
  • Gary Lyn
  • Andrés Rodríguez-Clare

Abstract

Although economists have long been interested in the implications of Marshallian externalities (i.e., industry-level external economies of scale) for trading economies, the large number of equilibria that they typically imply has kept such externalities out of the recent quantitative trade literature. This paper presents a multi-industry trade model with industry-level economies of scale that nests a Ricardian model with Marshallian externalities as well as multi-industry versions of Krugman (1980} and Melitz (2003). The behavior of the model depends on two industry-level elasticities: the trade elasticity and the scale elasticity. We show that there is a unique equilibrium if the product of the trade and scale elasticities is weakly lower than one in all industries. The welfare analysis reveals that if this condition is satisfied then all countries gain from trade, even when the scale elasticity varies across industries. The presence of scale economies tends to lower the gains from trade except if the country specializes in industries with relatively high scale elasticities. On the other hand, scale economies amplify the gains from trade liberalization except if it leads to reallocation towards industries with relatively low scale elasticities.

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  • Konstantin Kucheryavyy & Gary Lyn & Andrés Rodríguez-Clare, 2016. "Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale," NBER Working Papers 22484, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22484
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    5. Ma, Xiao, 2020. "College Expansion, Trade and Innovation: Evidence from China," MPRA Paper 109469, University Library of Munich, Germany.
    6. Jung, Benjamin & Kohler, Wilhelm, 2021. "Input-output linkages and monopolistic competition: Input distortion and optimal policies," Hohenheim Discussion Papers in Business, Economics and Social Sciences 06-2021, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
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    8. Taylor, Alan M. & Caliendo, Lorenzo & Feenstra, Robert & Romalis, John, 2021. "A Second-best Argument for Low Optimal Tariffs," CEPR Discussion Papers 15697, C.E.P.R. Discussion Papers.
    9. Rodrigo Adão & Costas Arkolakis & Federico Esposito, 2019. "General Equilibrium Effects in Space: Theory and Measurement," NBER Working Papers 25544, National Bureau of Economic Research, Inc.
    10. repec:hal:spmain:info:hdl:2441/mlkvtnbqe9pg8nsvf612mcnbs is not listed on IDEAS
    11. Egger, Peter & , & Nigai, Sergey, 2020. "Empirical Productivity Distributions and International Trade," CEPR Discussion Papers 15160, C.E.P.R. Discussion Papers.
    12. Farrokhi, Farid & Jinkins, David Carson & Xiang, Chong, 2022. "Gains from Trade and the Food Engel Curve," IZA Discussion Papers 15674, Institute of Labor Economics (IZA).
    13. Pablo Fajgelbaum & Pinelopi K. Goldberg & Patrick J. Kennedy & Amit Khandelwal & Daria Taglioni, 2021. "The US-China Trade War and Global Reallocations," NBER Working Papers 29562, National Bureau of Economic Research, Inc.
    14. Farrokhi, Farid & Jinkins, David & Xiang, Chong, 2022. "Gains from Trade and the Food Engel Curve," Working Papers 15-2022, Copenhagen Business School, Department of Economics.
    15. Simon Fuchs, 2018. "The Spoils of War: Trade Shocks during WWI and Spain’s Regional Development," 2018 Meeting Papers 1172, Society for Economic Dynamics.
    16. Rodrigo Ad'o & Costas Arkolakis & Federico Esp'sito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," Cowles Foundation Discussion Papers 2163, Cowles Foundation for Research in Economics, Yale University.
    17. Lorenzo Caliendo & Robert C. Feenstra & John Romalis & Alan M. Taylor, 2023. "Tariff Reductions, Heterogeneous Firms, and Welfare: Theory and Evidence for 1990–2010," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(4), pages 817-851, December.
    18. Keith Head & Thierry Mayer, 2019. "Brands in Motion: How Frictions Shape Multinational Production," American Economic Review, American Economic Association, vol. 109(9), pages 3073-3124, September.
    19. Lashkaripour, Ahmad, 2021. "The cost of a global tariff war: A sufficient statistics approach," Journal of International Economics, Elsevier, vol. 131(C).
    20. Lashkaripour, Ahmad, 2020. "Discrete trade," Journal of International Economics, Elsevier, vol. 126(C).

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    • F10 - International Economics - - Trade - - - General

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