Specialization, Market Access and Real Income

Dominick Bartelme (), Ting Lan and Andrei Levchenko

No 28274, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper estimates the impact of external demand shocks on real income. Our empirical strategy is based on a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows. The framework allows us to measure foreign shocks and characterize their impact on income in terms of reduced-form elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. We find clear evidence of heterogeneity in the income responses to different foreign shocks. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. The estimates imply that the pattern of sectoral specialization plays a quantitatively large role in how foreign shocks affect real income, while geographic position plays a smaller role. Finally, a calibrated multi-sector production and trade model can rationalize both the average and the heterogeneity in real income elasticities to foreign shocks under reasonable values of structural parameters.

JEL-codes: F43 F62 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cmp, nep-int and nep-opm
Note: IFM ITI
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Citations: View citations in EconPapers (4)

Published as Dominick Bartelme & Ting Lan & Andrei A. Levchenko, 2024. "Specialization, market access and real income," Journal of International Economics, .

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Journal Article: Specialization, market access and real income (2024)
Working Paper: Specialization, Market Access and Real Income (2024)
Working Paper: Specialization, Market Access and Real Income (2020)
Working Paper: Specialization, Market Access and Real Income (2020)
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