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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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    References listed on IDEAS

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    1. Denis Chetverikov & Bradley Larsen & Christopher Palmer, 2016. "IV Quantile Regression for Group‐Level Treatments, With an Application to the Distributional Effects of Trade," Econometrica, Econometric Society, vol. 84, pages 809-833, March.
    2. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2018. "Global Imbalances and Structural Change in the United States," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 761-796.
    3. Liang Bai & Sebastian Stumpner, 2019. "Estimating US Consumer Gains from Chinese Imports," American Economic Review: Insights, American Economic Association, vol. 1(2), pages 209-224, September.
    4. Timo Boppart, 2014. "Structural Change and the Kaldor Facts in a Growth Model With Relative Price Effects and Non‐Gorman Preferences," Econometrica, Econometric Society, vol. 82, pages 2167-2196, November.
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