INTERNATIONAL TRADE PUZZLES: A SOLUTION LINKING PRODUCTION AND PREFERENCES
By Justin Caron, Thibault Fally, James R. Markusen. World Scientific Studies in International Economics, 2014
182 citations recorded by the source corpus.
International trade literature tends to focus heavily on the production side of general equilibrium, leaving us with a number of empirical puzzles. There is, for example, considerably less world trade than predicted by Heckscher-Ohlin-Vanek (HOV) models. Trade among rich countries is higher and trade between rich and poor countries lower than suggested by HOV and other supply-driven theories, and trade-to-GDP ratios are higher in rich countries. Our approach focuses on the relationship between characteristics of goods and services in production and characteristics of preferences. In particular, we find a strong and significant positive correlation of more than 45% between a good’s skilled-labor intensity and its income elasticity, even when accounting for trade costs and cross-country price differences. Exploring the implications of this correlation for empirical trade puzzles, we find that it can reduce HOV’s overprediction of the variance of the net factor content of trade relative to that in the data by about 60%. Since rich countries are relatively skilled-labor abundant, they are relatively specialized in consuming the same goods and services that they are specialized in producing, and so trade more with one another than with poor countries. We also find a positive sector-level correlation between income elasticity and a sector’s tradability, which helps explain the higher trade-to-GDP ratios in high-income relative to low-income countries. JEL Codes: F10, F16, O10.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/92e5d32384eb909afaf2f745892e8caa63b99d81
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Citations in the corpus
- Does the EU ETS cause carbon leakage in European manufacturing? (2019, methodology): “While GTAP is frequently used for research on computable general equilibrium models, it has recently also been used for empirical research on international trade (Caron et al. 2014).”
- Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade (2019, unknown): “In their factor proportion models of trade, Markusen (1986) and Caron, Fally, and Markusen (2014), rich countries are assumed to be relatively more abundant in the factors used relatively more intensively in high income elastic sectors.”
- Structural Change With Long‐Run Income and Price Effects (2015, background): “Our paper also relates to the vast and rich empirical and quantitative literature aiming at quantifying the role of non-homotheticities on growth and development (see, among others, Echevarria (1997), Gollin et al.”