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Gains from Trade: Does Sectoral Heterogeneity Matter?

Rahul Giri, Kei-Mu Yi and Hakan Yilmazkuday ()

No 341, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper assesses the quantitative importance of including sectoral heterogeneity in computing the gains from trade. Our framework draws from Caliendo and Parro (2015) and Alvarez and Lucas (2007) and has sectoral heterogeneity along five dimensions, including the elasticity of trade to trade costs, the value-added share, and the input-output structure. The key parameter we estimate is the sectoral trade elasticity, and we use the Simonovska and Waugh (2014) simulated method of moments estimator with micro price data. Our estimates range from 2.97 to 8.94, considerably lower than those obtained with the Eaton and Kortum (2002) price-based method. Our benchmark model is calibrated to 21 OECD countries and 20 sectors. We compute the gains from trade in our benchmark model, and in several re-calibrated versions of the model in which we eliminate one or more sources of sectoral heterogeneity. Our main result is that sectoral heterogeneity does not always lead to an increase in the gains from trade. There are two reasons for this. First, the magnitudes of our estimated sectoral trade elasticities are relatively high, while the magnitude of our estimated aggregate trade elasticity is low. All else equal, this will lead to higher gains for the aggregate, one-sector model. Second, the sectors with low trade elasticities (hence, implying high gains from trade) are not the sectors with low value-added shares and with high initial trade shares (which would magnify the gains). Hence, the sectoral heterogeneity in our calibrated model does not exert complementary gains from trade effects.

Keywords: international price dispersion; simulated method of moments; gains from trade; estimated trade elasticities; sectoral heterogeneity; multi-sector trade (search for similar items in EconPapers)
JEL-codes: F11 F14 F17 F10 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2018-03-07, Revised 2018-03-07
New Economics Papers: this item is included in nep-int
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Working Paper: Gains from Trade: Does Sectoral Heterogeneity Matter? (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:341

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DOI: 10.24149/gwp341

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