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On the Heterogeneous Welfare Gains and Losses from Trade

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  • Daniel Carroll

    (Federal Reserve Bank of Cleveland)

  • Sewon Hur

    (Federal Reserve Bank of Cleveland)

Abstract

How are the gains and losses from trade (disruptions) distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with non-homothetic preferences---to generate the documented relationship between tradable expenditure shares, income, and wealth---and uninsurable earnings risk---to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade on households along the income and wealth distribution. In a numerical exercise, we increase trade costs by 20 percentage points and allow the economy to transition to a new steady state. We find that households in the lowest wealth decile experience welfare losses over the transition, measured by permanent consumption equivalents, that are 35 percent larger than those in the highest wealth decile. Finally, we find that the distributional impacts of trade significantly depend on how the tariff revenue is spent. In particular, using tariff revenue to reduce labor income taxes is close to welfare-neutral.

Suggested Citation

  • Daniel Carroll & Sewon Hur, 2019. "On the Heterogeneous Welfare Gains and Losses from Trade," 2019 Meeting Papers 1358, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1358
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    1. On the Heterogeneous Welfare Gains and Losses from Trade
      by Christian Zimmermann in NEP-DGE blog on 2019-11-15 02:09:41

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    6. Sewon Hur, 2023. "The Distributional Effects Of Covid‐19 And Optimal Mitigation Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 261-294, February.
    7. Daniel Carroll & Sewon Hur, 2023. "On The Distributional Effects Of International Tariffs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1311-1346, November.
    8. David Kohn & Fernando Leibovici & Michal Szkup, 2023. "No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, And Financial Development," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 809-836, May.
    9. Handbury, Jessie, 2020. "Comment on “On the Heterogeneous Welfare Gains and Losses from Trade” by Daniel Carroll and Sewon Hur," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 17-19.
    10. Jaravel, Xavier Laurent & Sager, Erick, 2019. "What are the price effects of trade? Evidence from the US and implications for quantitative trade models," LSE Research Online Documents on Economics 121819, London School of Economics and Political Science, LSE Library.
    11. Ma, Yong & Chen, Diandian, 2020. "Openness, rural-urban inequality, and happiness in China," Economic Systems, Elsevier, vol. 44(4).
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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