American Economic Review Vol. 104 No. 5 2014

Missing Gains from Trade?

Marc J. Melitz¹; Stephen J. Redding²

¹ Department of Economics, Harvard University, Littauer Center 215, 1805 Cambridge Street, Cambridge, MA 02138, CEPR, and NBER (e-mail: ) · ² Department of Economics and Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, NJ 08544 (e-mail: )

Abstract

In a class of trade models which satisfy a constant elasticity gravity equation, the welfare gains from trade can be computed using the open economy domestic trade share and a constant trade elasticity. The measured welfare gains from trade from this quantitative approach are typically relatively modest. In this paper, we suggest a channel for welfare gains that this quantitative approach typically abstracts from: trade-induced changes in domestic productivity. Using a model of sequential production, in which trade induces a reorganization of production that raises domestic productivity, we show that the welfare gains from trade can become arbitrarily large.

DOI

10.1257/aer.104.5.317

Volume

104

Issue

5

Pages

317-321

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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