Missing Gains from Trade?

Stephen Redding and Marc Melitz

No 9821, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: F10 F11 F15 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (69)

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Journal Article: Missing Gains from Trade? (2014)
Working Paper: Missing Gains from Trade? (2014)
Working Paper: Missing gains from trade? (2014)
Working Paper: Missing Gains from Trade? (2014)
Working Paper: Missing Gains from Trade? (2014)
Working Paper: Missing Gains from Trade?
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