Welfare Gains from Trade in Multi-Sector Models: The Role of Aggregation and Income Elasticities
46 Pages Posted: 12 Feb 2018 Last revised: 12 Feb 2019
Date Written: February 10, 2019
Sectoral heterogeneity has been shown to affect country-level welfare gains from trade that can be calculated by sector-specific trade elasticities and home expenditure shares. However, empirical analyses of multi-sector models are restricted to a limited number of countries and sectors, mostly due to the lack of data on sector-specific home expenditure shares. This paper first proposes a solution to this limitation by changing the way that foreign products are aggregated at the destination country, where "unbiased" multi-sector welfare gains can be captured by using country-specific trade elasticity measures. Second, the restrictive assumption of unitary importer-income elasticity is relaxed, and it is shown that the trade elasticity in the calculation of welfare gains is replaced by the newly-introduced welfare elasticity, a function of trade and income elasticities. Empirical evidence suggests that equal percentage changes in home expenditure shares result in unequal gains across countries depending on their elasticity measures.
Keywords: Welfare Gains, Income Elasticity, Trade Elasticity, Welfare Elasticity
JEL Classification: F12, F13, F14
Suggested Citation: Suggested Citation