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Trade with Correlation

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  • Nelson Lind
  • Natalia Ramondo

Abstract

We develop a trade model in which productivity presents an arbitrary pattern of correlation. The model approximates the full class of factor demand systems consistent with Ricardian theory. In particular, our framework formalizes Ricardo’s insight that countries gain more from trade with partners that have relatively dissimilar technology. Incorporating this insight entails a simple correction to the sufficient-statistic approach used for macro counterfactuals, and enables a general aggregation result that links macro demand systems to micro estimates. In our quantitative application, we estimate a multi-sector trade model which captures the possibility that nearby countries may share technology, and, hence, have correlated productivity draws. Our estimates suggest that accounting for correlation is key to calculating the gains from trade.

Suggested Citation

  • Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," NBER Working Papers 24380, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24380
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      • Oberfield, Ezra & Rossi-Hansberg, Esteban & Sarte, Pierre-Daniel & Trachter, Nicholas, 2020. "Plants in Space," CEPR Discussion Papers 14823, C.E.P.R. Discussion Papers.
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    3. Federico Esposito, 2019. "Demand Risk and Diversification through Trade," Discussion Papers Series, Department of Economics, Tufts University 0833, Department of Economics, Tufts University.
    4. Esposito, Federico, 2020. "Demand Risk and Diversification through International Trade," MPRA Paper 100865, University Library of Munich, Germany.
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    • F1 - International Economics - - Trade

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