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Skill premium and trade puzzles: A solution linking production factors and demand

  • Thibault FALLY

    (University of Colorado at Boulder)

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 nd a strong and signicant 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 dierences in prices. Counter-factual simulations yield a number of results. We can explain one third or more 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.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_1189.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1189.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1189
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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