Working Paper: NBER ID: w16904
Authors: Ariel Burstein; Jonathan Vogel
Abstract: How do trade liberalizations affect relative factor prices and to what extent do they cause factors to reallocate across sectors? We first present a general framework that nests a wide range of models that have been used to study the link between globalization and factor prices. Under some restrictions, changes in the "factor content of trade" are sufficient statistics for the impact of trade on relative factor prices. We then study the determination of the factor content of trade in a specific version of our general framework featuring imperfect competition, increasing returns to scale, and heterogeneous producers. We show how heterogeneous firms' decisions shape the factor content of trade, and, therefore, the impact of trade liberalization on relative factor prices and between-sector factor allocation.
Keywords: trade liberalization; factor prices; skill premium; factor allocation
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | factor content of trade (FCT) (F10) |
| factor content of trade (FCT) (F10) | skill premium (J24) |
| reduction in trade costs (F12) | reallocation of factors (F16) |
| reallocation of factors (F16) | relative price of factors (F16) |
| trade liberalization (F13) | factor prices (F16) |
| skill premium (J24) | factor reallocation (D25) |
| trade liberalization (F13) | changes in factor allocation (F16) |