Specialization, Market Access and Real Income

Dominick Bartelme, Ting Lan and Andrei Levchenko

No 2024/051, IMF Working Papers from International Monetary Fund

Abstract: This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform 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. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.

Keywords: trade specialization; real income; gravity; k-means clustering; IMF working paper 24/51; YYYY International Monetary Fund; investment sales share; open economy; Income; Exports; Export subsidies; Trade balance; East Asia (search for similar items in EconPapers)
Pages: 78
Date: 2024-03-08
New Economics Papers: this item is included in nep-int and nep-opm
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Related works:
Journal Article: 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)
Working Paper: Specialization, Market Access and Real Income (2020)
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