Welfare depends on the quantity, quality, and range of goods consumed. We use trade data, which report the quantities and prices of the individual goods that countries exchange, to learn about how the gains from trade and growth break down into these different margins. Our general equilibrium model, in which both quality and quantity contribute to consumption and to production, captures (i) how prices increase with importer and exporter per capita income, (ii) how the range of goods traded rises with importer and exporter size, and (iii) how products traveling longer distances have higher prices. Our framework can deliver a standard gravity formulation for total trade flows and for the gains from trade. We find that growth in the extensive margin contributes to about half of overall gains. Quality plays a larger role in the welfare gains from international trade than from economic growth due to selection.
Welfare depends on the quantity, quality, and range of goods consumed. We use trade data, which report the quantities and prices of the individual goods that countries exchange, to learn about how the gains from trade and growth break down into these different margins. Our general equilibrium model, in which both quality and quantity contribute to consumption and to production, captures (i) how prices increase with importer and exporter per capita income, (ii) how the range of goods traded rises with importer and exporter size, and (iii) how products traveling longer distances have higher prices. Our framework can deliver a standard gravity formulation for total trade flows and for the gains from trade. We find that growth in the extensive margin contributes to about half of overall gains. Quality plays a larger role in the welfare gains from international trade than from economic growth due to selection.
Interpreting individual heterogeneity in terms of probability theory has proved powerful in connecting behaviour at the individual and aggregate levels. Returning to Ricardo's focus on comparative efficiency as a basis for international trade, much recent quantitative equilibrium modeling of the global economy builds on particular probabilistic assumptions about technology. We review these assumptions and how they deliver a unified framework underlying a wide range of static and dynamic equilibrium models.
This chapter examines basic features of services trade and asks how well current modeling strategies capture the features. It then proposes and quantifies extensions to a basic structural gravity model that incorporate these features. The extended model allows people to handle goods trade and services trade in an encompassing framework. The chapter presents some basic facts about services trade and some quantitative implications of the model. Tangible goods are sold in country n at a markup over the cost of the inputs used to produce them. A result of the competition is that the low-cost producer of a variety serves the market and its price equals either the cost of the second lowest-cost potential supplier of that variety to market n or the monopoly price, whichever is lower. Ultimately, the value of intangible services will flow in the form of royalties to the country whose intangible sector generated the intangible assets.
We develop a dynamic multicountry general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multisector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during the period 2008-2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, accounts for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles.
We develop a Ricardian trade model that incorporates realistic geographic features into general equilibrium. It delivers simple structural equations for bilateral trade with parameters relating to absolute advantage, to comparative advantage (promoting trade), and to geographic barriers (resisting it). We estimate the parameters with data on bilateral trade in manufactures, prices, and geography from 19 OECD countries in 1990. We use the model to explore various issues such as the gains from trade, the role of trade in spreading the benefits of new technology, and the effects of tariff reduction.