Missing Gains from Trade?

10 Pages Posted: 2 Jun 2014

See all articles by Marc J. Melitz

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Stephen J. Redding

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: February 2014

Abstract

The theoretical result that there are welfare gains from trade is a central tenet of international economics. In a class of trade models that satisfy a "gravity equation", the welfare gains from trade can be computed using only the open economy domestic trade share and the elasticity of trade with respect to variable trade costs. 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.

Keywords: Productivity, Sequential Production, Welfare Gains from Trade

JEL Classification: F10, F11, F15

Suggested Citation

Melitz, Marc J. and Melitz, Marc J. and Redding, Stephen J., Missing Gains from Trade? (February 2014). CEPR Discussion Paper No. DP9821, Available at SSRN: https://ssrn.com/abstract=2444822

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

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