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Journal of Economic Perspectives: Vol. 26 No. 2 (Spring 2012)

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Gains from Trade When Firms Matter

Article Citation

Melitz, Marc J., and Daniel Trefler. 2012. "Gains from Trade When Firms Matter." Journal of Economic Perspectives, 26(2): 91-118.

DOI: 10.1257/jep.26.2.91

Abstract

The rising prominence of intra-industry trade and huge multinationals has transformed the way economists think about the gains from trade. In the past, we focused on gains that stemmed either from endowment differences (wheat for iron ore) or inter-industry comparative advantage (David Ricardo's classic example of cloth for port). Today, we focus on three sources of gains from trade: 1) love-of-variety gains associated with intra-industry trade; 2) allocative efficiency gains associated with shifting labor and capital out of small, less-productive firms and into large, more-productive firms; and 3) productive efficiency gains associated with trade-induced innovation. This paper reviews these three sources of gains from trade both theoretically and empirically. Our empirical evidence will be centered on the experience of Canada following its closer economic integration in 1989 with the United States—the largest example of bilateral intra-industry trade in the world—but we will also describe evidence for other countries.

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Authors

Melitz, Marc J. (Harvard U)
Trefler, Daniel (U Toronto)

JEL Classifications

F11: Neoclassical Models of Trade
F14: Country and Industry Studies of Trade
F23: Multinational Firms; International Business

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