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Deconstructing the Gains from Trade: Selection of Industries vs. Reallocation of Workers

Stefano Bolatto and Massimo Sbracia ()

MPRA Paper from University Library of Munich, Germany

Abstract: In a Ricardian model with CES preferences and general distributions of industry efficiencies, the sources of the welfare gains from trade can be precisely decomposed into a selection and a reallocation effect. The former is the change in average efficiency due to the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries in domestic production, due the reallocation of workers away from less-efficient non-exporting industries. This decomposition, which is hard to calculate in the general case, simplifies dramatically if industry efficiencies are Fréchet distributed, providing easy-to-quantify model-based measures of these two effects. Under this assumption, we also show that when the gains from trade are small, it is the selection effect that matters most; as the gains from trade rise and the size of the export sector grows, so does the importance of the reallocation effect.

Keywords: comparative advantage; selection effect; reallocation effect (search for similar items in EconPapers)
JEL-codes: F1 F10 F11 F40 (search for similar items in EconPapers)
Date: 2014-06-13
New Economics Papers: this item is included in nep-int
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Journal Article: Deconstructing the Gains from Trade: Selection of Industries vs Reallocation of Workers (2016) Downloads
Working Paper: Deconstructing the gains from trade: selection of industries vs. reallocation of workers (2015) Downloads
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