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

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  • Thibault FALLY

    (University of Colorado at Boulder)

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 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.

Suggested Citation

  • Thibault FALLY, 2012. "Skill premium and trade puzzles: A solution linking production factors and demand," 2012 Meeting Papers 1189, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1189
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_1189.pdf
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    References listed on IDEAS

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    1. Inmaculada Martínez-Zarzoso & Sebastian Vollmer, 2010. "Bilateral trade flows and income-distribution similarity," Working Papers 10-06, Asociación Española de Economía y Finanzas Internacionales.
    2. Kiminori Matsuyama, 2000. "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1093-1120, December.
    3. Fally, Thibault & Paillacar, Rodrigo & Terra, Cristina, 2010. "Economic geography and wages in Brazil: Evidence from micro-data," Journal of Development Economics, Elsevier, vol. 91(1), pages 155-168, January.
    4. James Cassing & Shuichiro Nishioka, 2009. "Nonhomothetic Tastes and Missing Trade of Factor Services," Working Papers 09-03, Department of Economics, West Virginia University.
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    Cited by:

    1. 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.

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