Working Paper: NBER ID: w21401
Authors: Rodrigo Adao; Arnaud Costinot; Dave Donaldson
Abstract: We develop a methodology to construct nonparametric counterfactual predictions, free of functional-form restrictions on preferences and technology, in neoclassical models of international trade. First, we establish the equivalence between such models and reduced exchange models in which countries directly exchange factor services. This equivalence implies that, for an arbitrary change in trade costs, counterfactual changes in the factor content of trade, factor prices, and welfare only depend on the shape of a reduced factor demand system. Second, we provide sufficient conditions under which estimates of this system can be recovered nonparametrically. Together, these results offer a strict generalization of the parametric approach used in so-called gravity models. Finally, we use China's recent integration into the world economy to illustrate the feasibility and potential benefits of our approach.
Keywords: Counterfactual Predictions; International Trade; Neoclassical Models
JEL Codes: F10; F11; F14; F15; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in trade costs (F12) | Changes in factor prices (F16) |
| Changes in trade costs (F12) | Changes in welfare outcomes (I38) |
| Changes in factor prices (F16) | Changes in welfare outcomes (I38) |
| China's integration into the global economy (F15) | Changes in welfare outcomes in rich countries (I38) |
| China's integration into the global economy (F15) | Changes in welfare outcomes in poorer countries (F63) |