Missing Gains from Trade?
American Economic Review
vol. 104,
no. 5, May 2014
(pp. 317-21)
Abstract
In a class of trade models which satisfy a constant elasticity gravity equation, the welfare gains from trade can be computed using the open economy domestic trade share and a constant trade elasticity. The measured welfare gains from trade from this quantitative approach are typically relatively modest. In this paper, we suggest a channel for welfare gains that this quantitative approach typically abstracts from: trade-induced changes in domestic productivity. Using a model of sequential production, in which trade induces a reorganization of production that raises domestic productivity, we show that the welfare gains from trade can become arbitrarily large.Citation
Melitz, Marc J., and Stephen J. Redding. 2014. "Missing Gains from Trade?" American Economic Review, 104 (5): 317-21. DOI: 10.1257/aer.104.5.317Additional Materials
JEL Classification
- F11 Neoclassical Models of Trade
- F43 Economic Growth of Open Economies