Gains From Trade With Variable Trade Elasticities

Abstract

We measure gains from trade in multisector economies with nonhomothetic preferences where changes in trade costs generate reallocation of expenditure across sectors. We show how to measure the trade elasticity and how it relates to welfare. In this environment, the trade elasticity now varies both across countries and with levels of trade costs. In an application, we find that the trade elasticity varies substantially across countries and that the gains from moving from autarky to observed trade are on average between 24% and 28% greater than in a model where the trade elasticity is constant.

Agglomeration, Misallocation, and (the Lack of) Competition

“…Harberger-style estimates of the costs of monopoly pricing in the US are of the order of 1-4% (Baker, 2003). Estimated static gains from autarky to trade are of the order of 2-4% (Brooks and Pujolas, 2019). The estimates of the costs of business cycles are of the order of 0.1 percent (Robert E. Lucas, 2003).…”

Trade and the propagation of global shocks

“…There is an interesting literature on related topics. Brooks and Pujolas (2019) show that accounting for cross‐country variations in trade elasticity may imply that gains from trade may be 24%–28% higher than standard estimates. This in contrast to Arkolakis et al.…”