Measuring the Unequal Gains From Trade

How are the gains distributed across individuals? What is the relative importance of income and consumption effects? First, we use survey data from a small open economy during 20 years to measure how international price variation impacted on the distribution of welfare through income and consumption effects. Then, we propose a new methodology for measuring the distribution of the gains from trade using aggregate trade data. In the theory, we embed the Almost Ideal Demand System into otherwise standard models of trade. We show that, given arbitrary shocks to income and prices, welfare changes at the individual level can be decomposed into: i) a common a term that captures aggregate gains from trade in the absence of inequality; ii) an individual taste effect that depends on relative price changes and non-homotheticity in preferences; and iii) an individual expenditure effect that captures shocks to total expenditures. We characterize conditions under which the common and the individual taste and expenditure effects can be recovered from aggregate expenditure data and prices, and we contrast the predictions of this approach with the micro approach based on survey data.