Skill premium and trade puzzles: A solution linking production factors and demand
Thibault Fally ()
No 1189, 2012 Meeting Papers from Society for Economic Dynamics
International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we nd a strong and signicant positive relationship between skilled-labor intensity in production and income-elasticity of demand for several types of preferences, with and without accounting for trade costs and dierences in prices. Counter-factual simulations yield a number of results. We can explain one third or more of "missing trade", and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:1189
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More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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