Measuring the Unequal Gains from Trade
Coauthor(s): Pablo Fajgelbaum.
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Individuals that consume different baskets of goods are differently affected by the relative price changes caused by trade. We develop a methodology to measure the unequal gains from trade across consumers through this channel using aggregate statistics. The methodology exploits that changes in aggregate expenditures reflect changes in the relative prices of high- versus low-income elastic goods, resulting in different welfare implications across consumers. We embed the Almost-Ideal Demand System into a standard model of trade and show that the unequal gains from trade are captured by the bias of aggregate trade shares toward high income elastic goods. We estimate the model and find that the distributional effects of trade are large relative to the aggregate effects. In the typical country moving from trade to autarky makes low-income consumers relatively better o than the rich (i.e., the gains from trade are "pro-rich"), although in some cases such as the U.S. and Japan the gains from trade are pro-poor. Surprisingly, in some countries a measurable subset of the population-either at the top or bottom part of the expenditure distribution- would experience an absolute welfare gain if moved to autarky.
Fajgelbaum, Pablo, and Amit Khandelwal. "Measuring the Unequal Gains from Trade." Columbia Business School, September 2013.