Each year in the US, hundreds of billions of dollars are spent on transportation infrastructure and billions of hours are lost in traffic. We develop a quantitative general equilibrium spatial framework featuring endogenous transportation costs and traffic congestion and apply it to evaluate the welfare impact of transportation infrastructure improvements. Our approach yields analytical expressions for transportation costs between any two locations, the traffic along each link of the transportation network, and the equilibrium distribution of economic activity across the economy, each as a function of the underlying quality of infrastructure and the strength of traffic congestion. We characterize the properties of such an equilibrium and show how the framework can be combined with traffic data to evaluate the impact of improving any segment of the infrastructure network. Applying our framework to both the US highway network and the Seattle road network, we find highly variable returns to investment across different links in the respective transportation networks, highlighting the importance of well-targeted infrastructure investment.

Micro-level data have had a profound influence on research in international trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. In this paper we investigate to what extent answers to new micro-level questions have affected answers to an old and central question in the field: how large are the welfare gains from trade? A crude summary of our results is: “So far, not much.”

We study the gains from trade liberalization in models with monopolistic competition, firm-level heterogeneity, and variable markups. For a large class of demand functions used in the international macro and trade literature, we derive a parsimonious generalization of the welfare formula in Arkolakis et al. (2012). We then use both estimates from micro-level trade data and evidence regarding firm-level pass through to quantify the implications of this new formula.Within the class of models that we consider, our main finding is that gains from trade liberalization predicted by models with variable markups are equal to, at best, and slightly lower than, at worst, those predicted by models with constant markups. In this sense, pro-competitive effects of trade are elusive.

We develop a quantifiable general equilibrium model of trade and multinational production (MP) in which countries can specialize in innovation or production. Home market effects or comparative advantage leads some countries to specialize in innovation and relegate manufacturing operations to other countries via outward MP. Counterfactual analysis reveals that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production, although these losses tend to be very small. Contrary to popular fears, production workers gain even in countries that further specialize in innovation.