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Missing Gains from Trade?

Author(s): Melitz, Marc J.; Redding, Stephen J.

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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.
Publication Date: May-2014
Citation: Melitz, Marc J, Redding, Stephen J. (2014). Missing Gains from Trade? American Economic Review, 104 (5), 317 - 321. doi:10.1257/aer.104.5.317
DOI: doi:10.1257/aer.104.5.317
ISSN: 0002-8282
Pages: 317 - 321
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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