Trade Theory with Numbers: Quantifying the Consequences of Globalization

Abstract

We review a recent body of theoretical work that aims to put numbers on the consequences of globalization. A unifying theme of our survey is methodological. We rely on gravity models and demonstrate how they can be used for counterfactual analysis. We highlight how various economic considerations-market structure, firm-level heterogeneity, multiple sectors, intermediate goods, and multiple factors of production-affect the magnitude of the gains from trade liberalization. We conclude by discussing a number of outstanding issues in the literature as well as alternative approaches for quantifying the consequences of globalization.

The Costs and Benefits of Leaving the EU

“…Our methodology is heavily based on Costinot and Rodriguez-Clare (2013) -please check Section 4 of that paper for details on the methodology used here.…”

“…This database encompasses 40 countries and an additional region denominated the 'rest of the world'. It covers 35 sectors, which we further aggregate into 31 sectors as in Costinot and Rodriguez-Clare (2013) to account for small trade in some sectors around the world.…”

“…To find the change over time, we use the values of Méjean and Schwellnus (2009) (Table 1, Notes: Counterfactuals changes in welfare, measured by changes in real GDP. Methodology based on Costinot and Rodriguez-Clare (2013). Fiscal benefit information comes from Treasury (2013).…”

“…Our methodology is based on Costinot and Rodriguez-Clare (2013). We define distinct scenarios and calculate the changes in welfare, measured by real consumption, generated by a UK exit from the EU.…”

“…We focus on the effects of trade on welfare net of lower fiscal transfers to the EU. We use a standard quantitative static general equilibrium trade model with multiple sectors, countries and intermediates, as in Costinot and Rodriguez-Clare (2013). Static losses range between 1.13% and 3.09% of GDP, depending on the assumptions used in our counterfactual scenarios.…”