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Trade, Diffusion and the Gains from Openness

  • Andres Rodriguez-Clare

    (Pennsylvania State University)

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 and diffusion of ideas, and then quantifies the overall gains from openness and the contribution of trade to 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. It is shown that for this match it is necessary to introduce diffusion and/or knowledge spillovers to the basic model of trade and growth in Eaton and Kortum (2001). The main result of the paper is that, compared to the model without diffusion, the gains from trade are smaller whereas the gains from openness are much larger when diffusion is included in the model.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 126.

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Date of creation: 2007
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Handle: RePEc:red:sed007:126
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Wolfgang Keller, 1997. "Are International R&D Spillovers Trade-Related? Analyzing Spillovers Among Randomly Matched Trade Partners," NBER Working Papers 6065, National Bureau of Economic Research, Inc.
  2. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc.
  3. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  4. Ariel Burstein & Andrew Atkeson, 2009. "Innovation, Firm Dynamics, and International Trade," 2009 Meeting Papers 186, Society for Economic Dynamics.
  5. Jones, C.I., 2000. "Sources of U.S. Economic Growth in a World of Ideas," Papers 99-29, United Nations World Employment Programme-.
  6. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 531-55, May.
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  8. Andrew B. Bernard & J. Bradford Jensen, 1999. "Exporting and Productivity," NBER Working Papers 7135, National Bureau of Economic Research, Inc.
  9. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
  10. Natalia Ramondo, 2006. "Size, Geography, and Multinational Production," 2006 Meeting Papers 472, Society for Economic Dynamics.
  11. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  12. Rose, Andrew K, 2005. "Size Really Doesn't Matter: In Search of a National Scale Effect," CEPR Discussion Papers 5350, C.E.P.R. Discussion Papers.
  13. Mary Hallward-Driemeier & Giuseppe Iarossi & Kenneth L. Sokoloff, 2002. "Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-Level Data," NBER Working Papers 8894, National Bureau of Economic Research, Inc.
  14. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  15. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  16. Jonathan Eaton & Samuel Kortum, 2006. "Innovation, Diffusion, and Trade," NBER Working Papers 12385, National Bureau of Economic Research, Inc.
  17. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
  18. Jaffe, A.B. & Trajtenberg, M., 1998. "International Knowledge Flows: Evidence from Patent Citation," Papers 11-98, Tel Aviv.
  19. Krugman, Paul, 1979. "A Model of Innovation, Technology Transfer, and the World Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 253-66, April.
  20. Keith Head & John Ries, 2004. "Exporting and FDI as Alternative Strategies," Oxford Review of Economic Policy, Oxford University Press, vol. 20(3), pages 409-423, Autumn.
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