I develop a novel view of the trade frictions between rich and poor countries by arguing that to reconcile bilateral trade volumes and price data within a standard gravity model, the trade frictions between rich and poor countries must be systematically asymmetric, with poor countries facing higher costs to export relative to rich countries. I provide a method to model these asymmetries and demonstrate the merits of my approach relative to alternatives in the trade literature. I then argue that these trade frictions are quantitatively important to understanding the large differences in standards of living and total factor productivity across countries.

We construct a model of international trade and multinational production (MP) to examine the impact of globalization on the skill premium in skill-abundant and skill-scarce countries. The key mechanisms in our framework arise from the interaction between three elements: asymmetric countries, technological heterogeneity across producers within sectors, and skill-biased technology. Reductions in trade and/or MP costs induce a reallocation of resources towards a country’s comparative advantage sector (increasing the skill premium in skill-abundant countries and reducing it in skill-scarce countries) and within sectors towards more productive and skill-intensive producers (increasing the skill premium in all countries). We parameterize the model to match salient features of the extent and composition of trade and MP between the U.S. and skill-abundant and skill-scarce countries in 2006. We show that a reduction in trade and MP costs, moving from autarky to 2006 levels of trade and MP, increases the skill premium by 5 % in skill-abundant countries and 6 % in skill-scarce countries. Globalization accounts for between 1=9th and 1=6th of the 24 % rise in the U.S. skill premium between 1966 and 2006. MP is at least as important as international trade in generating this rise in the skill premium. We thank Francisco Alcalá, Chris Kurz, and especially Eric Verhoogen for help with their data. We are grateful to

Empirical studies find a strong positive relationship between a country’s per-capita income and price level of final tradable goods. Among alternative explanations of this observation, I focus on variable mark-ups by firms. Mark-ups that vary with destinations ’ incomes are evident from a clothing manufacturer’s online catalogue featuring unit prices of identical goods sold in 28 countries. Such price discrimination on the basis of income suggests that firms exploit lower price elasticity of demand for identical goods in richer countries. In order to capture that, I introduce non-homothetic preferences in a model of trade with product differentiation and heterogeneity in firm productivity. The model helps bring theory and data closer along a key dimension: it generates positively related prices and incomes, while preserving desirable features of firm behavior and trade flows of existing frameworks. Quantitatively, the model suggests that variable mark-ups can account for at least a half of the observed positive relationship between prices of tradables and income across a large sample of countries.

Abstract. The Ricardian model predicts that countries should produce and export relatively more in industries in which they are relatively more productive. Though one of the most celebrated insights in the theory of international trade, this prediction has received little attention in the empirical literature since the mid-1960s. The main reason behind this lack of popularity is the absence of clear theoretical foundations to guide the empirical analysis. Building on the seminal work of Eaton and Kortum (2002), we offer such foundations and use them to quantify the importance of Ricardian comparative advantage. In the process, we also provide a theoretically-consistent alternative to Balassa’s (1965) well-known index of ‘revealed comparative advantage.’

In this paper we build into a Ricardian model the role of trade in intermediate inputs, sectoral linkages and differing productivity levels across sectors. The model can be used for both ex-ante and ex-post trade policy evaluation. We also propose a new method to estimate sectoral trade elasticities. Estimation requires only trade and tariff data and does not require the assumption of bilaterally symmetric trade costs. With the model and estimates of sectoral trade elasticities for the year 1993, we evaluate the trade and welfare e¤ects of the North American Free Trade Agreement (NAFTA). We do so by incorporating into the model the change in tariffs from 1993 to 2005 to calculate the implied changes in exports and imports. We compare these calculated changes to their observed counterparts and find that the model matches the observed outcomes well. We find that as a consequence of the tariff reductions, real wages increased in all NAFTA countries. Mexico had the largest gains, while Canada and the United States gained relatively more from trade liberalization against the rest of the world than from trade liberalization within NAFTA over the sample period.

Raphael AuerThe views expressed in this paper are those of the author(s) and do not necessarily represent those of the

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. There are two novelties in the paper. First, I introduce an association between market access costs and countries ’ development levels, which can account for the e¤ect of per capita income on trade volumes and explain many zeros in bilateral trade ‡ows. Secondly, I develop an estimation procedure, which allows me to estimate both variable and …xed costs of trade. I …nd that given the estimated parameters, the model performs well in matching the data. In particular, the predicted trade elasticity with respect to income per capita is close to that in the data.

How does a country’s productivity growth a¤ect worldwide real incomes through international trade? In this paper, we take this classic question to the data by measuring the spillover e¤ects of China’s productivity growth. Our framework features traditional terms-of-trade e¤ects and new trade home market e¤ects as suggested by the theoretical literature and works from a reference point which perfectly matches industry-level trade. Focusing on the years 1995 to 2007, we …nd that the cumulative welfare e¤ect on individual regions ranges between-1.2 percent and 3.6 percent and only 3.0 percent of the worldwide gains of China’s productivity growth accrue to the rest of the world.

What has driven trade booms and trade busts in the past and present? We employ a micro-founded measure of trade frictions consistent with leading trade theories to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally, the entirety of the interwar trade bust is explained by increases in trade costs.

The international trade literature, despite its reliance on general-equilibrium analysis, focuses on the supply side and does not provide a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good’s factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive correlation between skilled-labor intensity and income elasticity for several types of preferences, with and without accounting for trade costs and cross-country price differences. Our general-equilibrium framework allows us to quantify the implications of this correlation. We show that it can explain about one third of “missing trade”, and that per-capita income plays an important role in determining trade/GDP ratios and the choice of trading partners. It implies, furthermore, that uniform productivity growth shifts consumption towards skilled-labor intensive goods, generating a novel demand-driven explanation for the observed increase in the skill premium. Counterfactual simulations in general-equilibrium find this effect to be large, particularly in developing countries. Keywords: Non-homothetic preferences, gravity, income, missing trade, skill premium.