On the Heterogeneous Welfare Gains and Losses from Trade

By Daniel Carroll and Sewon Hur

http://d.repec.org/n?u=RePEc:fip:fedcwq:190602&r=dge

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.

I sometimes hear the argument that the poor benefit the least (if not lose) from international trade: they face potentially lower wages and their job are more likely to be outsourced. Today, I learned that in fact they have a large benefit from their purchases, which are more likely to be tradables than for the general population. The paper argues that this makes them benefit overall more than anybody else from trade, including during a transition while trade is opened more.

One Response to On the Heterogeneous Welfare Gains and Losses from Trade

  1. Sewon Hur says:

    Thanks Christian for reading our paper! An important caveat is that we do not consider the labor market effects of trade. However, we find that the differential welfare gains from the price effects of trade (in our paper) are as important as the differential welfare gains from the labor market effects of trade (found in Caliendo, Dvorkin, and Parro (2019) and Lyon and Waugh (2019)).

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