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Commodity Trade Matters

Thibault Fally () and James Sayre

No 172, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Primary commodities account for approximately 16 percent of world trade, yet they are used extensively as intermediate inputs into many production processes. We show that ignoring several key features of trade in commodities leads to a large understatement of aggregate gains from trade despite their relatively small share of world trade. We quantify the welfare gains from international trade when we account for specific characteristics of most primary commodities: i) a low price elasticity of demand as a result of difficulty in finding substitutes, ii) a low price elasticity of supply, and iii) a high concentration of natural resources and production among a few countries. For instance, copper is difficult to replace in the electronic equipment industry, the supply and demand for copper vary only slightly with changes in prices, a large share of its supply comes from Chile and copper accounts for half of Chilean total export revenues. We explicitly account for these features in a general-equilibrium model of consumption, production, and input-output linkages. In our simulations, we confirm that ignoring these specific features of commodities leads to a wide understatement of the aggregate gains from trade.

Date: 2018
New Economics Papers: this item is included in nep-int
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Working Paper: Commodity Trade Matters (2018) Downloads
Working Paper: Commodity Trade Matters (2018) Downloads
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