Working Paper: CEPR ID: DP9821
Authors: Marc J. Melitz; Stephen J. Redding
Abstract: The theoretical result that there are welfare gains from trade is a central tenet of international economics. In a class of trade models that satisfy a "gravity equation", the welfare gains from trade can be computed using only the open economy domestic trade share and the elasticity of trade with respect to variable trade costs. 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.
Keywords: productivity; sequential production; welfare gains from trade
JEL Codes: F10; F11; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade (F19) | domestic productivity (O49) |
| domestic productivity (O49) | welfare gains from trade (F10) |
| trade (F19) | welfare gains from trade (F10) |
| trade shares (G10) | domestic productivity (O49) |
| trade shares (G10) | welfare gains from trade (F10) |