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Global Gains from Reduction of Trade Costs

  • Han QI

    (Hong Kong University of Science and Technology)

  • Haichao Fan

    (Hong Kong University of Science and Technology)

  • Edwin Lai

    (Hong Kong University of Science and Tech)

We derive a simple equation to calculate the global welfare impact of the simultaneous reduction of trade costs between multiple country-pairs. Interestingly, we find that we obtain the same equation for a broad class of trade models. Moreover, balanced trade is mostly not required for the equation to work, nor does trade elasticity need to be known. The global welfare impact only depends on two sets of statistics: (i) the ratio of bilateral trade flow between each pair of trading partners and global income; and (ii) the percentage change in exporting cost for each pair of trading partners. The class of models includes the many-country, many-good neo-classical-type model, and the Armington-type models such as Eaton and Kortum (2002), Krugman (1980), Melitz (2003) with Pareto distribution of firm productivity, and the extensions of these models to the multi-country and multi-sector case, multi-factor production technology, multi-stage production, the existence of intermediate good and the existence of a non-traded good sector in each country. We then apply the equation to estimate the global welfare impact of the worldwide reduction of international shipping costs in the last five decades.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1283.

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Date of creation: 2013
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Handle: RePEc:red:sed013:1283
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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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