On the Heterogeneous Welfare Gains and Losses from Trade

Abstract

How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences-to generate the documented relationship between tradable expenditure shares, income, and wealth-and uninsurable earnings risk-to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 57 percent larger than those in the highest wealth decile.

The Winners and Losers from Trade

“…The lowest and highest wealth deciles have average tradable expenditure shares of 39 percent and 30 percent, respectively, across the two data sets. In Carroll and Hur (2019), we demonstrate that the negative relationship between tradable expenditure shares and disposable labor income and wealth is robust to controlling for age and education of the household head, household size, and home ownership.…”

“…As with the labor market effects, the price effects from trade are not shared equally across households either, because households of different incomes buy somewhat different bundles of goods and services. In a recent Federal Reserve Bank of Cleveland working paper, we show that the consumer gains from price declines in tradables are unequally distributed across households (Carroll and Hur, 2019). We do so by documenting that the share of consumption expenditures that are tradable is higher for households with low income and wealth (Carroll and Hur, 2019).…”

“…In a recent Federal Reserve Bank of Cleveland working paper, we show that the consumer gains from price declines in tradables are unequally distributed across households (Carroll and Hur, 2019). We do so by documenting that the share of consumption expenditures that are tradable is higher for households with low income and wealth (Carroll and Hur, 2019). We use two complementary datasets for this study, the Consumer Expenditure Survey (CEX) and the Panel Study of Income Dynamics (PSID).…”

“…On net, how important is each channel? To shed some light on the answer to this question, in Carroll and Hur (2019) we quantify the price effect within a model and relate the magnitude of this channel to that of the labor market effect quantified in other papers.…”

On the Distributional Effects of International Tariffs

“…Answering this question requires a careful quantitative analysis because tariffs affect households along many dimensions. Tariffs raise the prices of tradable goods and services, and poor households spend relatively more on these than the rich, as documented by Cravino and Levchenko (2017) and Carroll and Hur (2020). Tariffs also discourage capital accumulation by increasing the cost of capital production.…”