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

See all articles by HAKAN YILMAZKUDAY

HAKAN YILMAZKUDAY

Florida International University (FIU) - Department of Economics

Date Written: February 10, 2019

Abstract

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

Yilmazkuday, Hakan, Welfare Gains from Trade in Multi-Sector Models: The Role of Aggregation and Income Elasticities (February 10, 2019). Available at SSRN: https://ssrn.com/abstract=3118728 or http://dx.doi.org/10.2139/ssrn.3118728

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://faculty.fiu.edu/~hyilmazk/

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