Working Paper: NBER ID: w9086
Authors: Kala Krishna; Abhiroop Mukhopadhyay; Cemile Yavas
Abstract: This paper explains the differential impacts of trade on countries in terms of institutional differences which result in factor market distortions. We modify the Ricardian, Specific Factor and Hecksher Ohlin models of trade to capture these. Trade has both terms of trade effects and output effects. Both work to raise welfare in an undistorted economy. In a distorted economy, price effects work to improve welfare, while output effects work to reduce it. Large distorted countries are more likely to lose from trade as beneficial price effects are lower. In addition the greater the substitutability between goods, the more likely it is that welfare rises through trade.
Keywords: trade; labor market distortions; heterogeneous labor; welfare; institutional differences
JEL Codes: F16; O17; P23; P33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market distortions (J48) | allocation of labor (J29) |
| allocation of labor (J29) | output (C67) |
| trade liberalization (F13) | welfare (in distorted economies) (D69) |
| high substitutability between goods (D43) | potential for welfare gains through trade (F10) |
| trade liberalization in distorted economies (F69) | negative outcomes for larger distorted economies (F69) |
| institutional constraints (D02) | inefficient labor allocation (J29) |
| inefficient labor allocation (J29) | suboptimal production and welfare outcomes (D69) |
| autarky (F00) | welfare impact of distortions (D69) |