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Title: Missing Gains from Trade?

Author(s): Marc J Melitz and Stephen J. Redding

Publication Date: February 2014

Keyword(s): Productivity, Sequential Production and Welfare Gains from Trade

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Melitz, M and Redding, S. 2014. 'Missing Gains from Trade?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9821