Working Paper: CEPR ID: DP13132
Authors: Thibault Fally; James Sayre
Abstract: Primary commodities are used as inputs into all production processes, yet they account for approximately 16 percent of world trade. Despite their share in trade, we show that the aggregate gains from trade are largely understated if we ignore key features of commodities: low price elasticities of demand (difficulty in finding substitutes), low price elasticities of supply, and high dispersion of natural resources across countries. We develop a general-equilibrium model of consumption, production, and input-output linkages that explicitly accounts for these features. Our simulations confirm that the gains from trade are significantly larger, especially when considering large trade cost changes.
Keywords: gains from trade; primary commodities; multistage production
JEL Codes: F10; O13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low price elasticities of demand and supply (D11) | Underestimation of gains from trade (F11) |
| Difficulty in finding substitutes (D10) | Underestimation of gains from trade (F11) |
| High dispersion of natural resources (Q33) | Underestimation of gains from trade (F11) |
| Trade with commodities (G13) | Larger gains from trade (F12) |
| Increased trade barriers (F14) | Changes in trade costs (F12) |
| Changes in trade costs (F12) | Larger gains from trade (F12) |
| Large countries (O57) | Gains from trade double (F14) |
| Small resource-limited countries (Q32) | Enormous gains from trade (F11) |
| Ignoring specific features (C52) | Significant understatement of gains from trade (F11) |
| Disruptions in supply (F69) | Substantial price changes (E30) |
| Major suppliers like China (F10) | Price changes (P22) |