Expansion of Trade at the Extensive Margin: A General Gains-from-Trade Result and Illustrative Examples

28 Pages Posted: 26 Apr 2010 Last revised: 9 Jul 2010

See all articles by James R. Markusen

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: April 2010

Abstract

The basic gains-from-trade theorem makes a stark comparison between completely free trade and complete autarky. This paper is motivated by recent evidence that trade has greatly expanded on the extensive margin (aka fragmentation, offshoring) by adding newly traded goods and services and that much of this new trade is in intermediates. I provide an extension of existing gains-from-trade results by allowing trade in an added set of final and/or intermediate goods. As seems generally understood, a sufficient condition for all countries to gain from fragmentation is that the relative world prices of initially-trade goods don't change. However, trade costs break the strict link between domestic and world prices in my approach and this results in interesting subtleties as initially-traded goods change their trade status following fragmentation. I illustrate these results by applying them to two recent and quite specific formulations of expansion at the extensive margin: Grossman and Rossi-Hansberg (2008) and Markusen and Venables (2007). Symmetry in two senses results in gains for all countries: countries are relatively symmetric in size and the newly-traded goods are relatively symmetric in their factor intensities with respect to the world endowment ratio.

Suggested Citation

Markusen, James R., Expansion of Trade at the Extensive Margin: A General Gains-from-Trade Result and Illustrative Examples (April 2010). NBER Working Paper No. w15926. Available at SSRN: https://ssrn.com/abstract=1594560

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

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Boulder, CO 80309
United States
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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