Trade with Correlation

64 Pages Posted: 6 Mar 2018 Last revised: 12 Aug 2024

See all articles by Nelson Lind

Nelson Lind

University of California, San Diego (UCSD)

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)

Date Written: March 2018

Abstract

We develop a trade model in which productivity presents an arbitrary pattern of correlation. The model approximates the full class of factor demand systems consistent with Ricardian theory. In particular, our framework formalizes Ricardo’s insight that countries gain more from trade with partners that have relatively dissimilar technology. Incorporating this insight entails a simple correction to the sufficient-statistic approach used for macro counterfactuals, and enables a general aggregation result that links macro demand systems to micro estimates. In our quantitative application, we estimate a multi-sector trade model which captures the possibility that nearby countries may share technology, and, hence, have correlated productivity draws. Our estimates suggest that accounting for correlation is key to calculating the gains from trade.

Suggested Citation

Lind, Nelson and Ramondo, Natalia, Trade with Correlation (March 2018). NBER Working Paper No. w24380, Available at SSRN: https://ssrn.com/abstract=3134275

Nelson Lind (Contact Author)

University of California, San Diego (UCSD) ( email )

Natalia Ramondo

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

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