American Economic Review: Vol. 104 No. 5 (May 2014)

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Missing Gains from Trade?

Article Citation

Melitz, Marc J., and Stephen J. Redding. 2014. "Missing Gains from Trade?" American Economic Review, 104(5): 317-21.

DOI: 10.1257/aer.104.5.317

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.

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Authors

Melitz, Marc J. (Harvard U)
Redding, Stephen J. (Princeton U)

JEL Classifications

F11: Neoclassical Models of Trade
F43: Economic Growth of Open Economies


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