Gains from Trade: Does Sectoral Heterogeneity Matter?

54 Pages Posted: 15 Jun 2018 Last revised: 21 Feb 2019

See all articles by Hakan Yilmazkuday

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Kei-Mu Yi

University of Houston - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Rahul Giri

Centro de Investigación (CIE), Instituto Tecnológico Autónomo de México (ITAM); International Monetary Fund

Date Written: 2018-03-07

Abstract

This paper assesses the quantitative importance of including sectoral heterogeneity in computing the gains from trade. Our framework draws from Caliendo and Parro (2015) and Alvarez and Lucas (2007) and has sectoral heterogeneity along five dimensions, including the elasticity of trade to trade costs, the value-added share, and the input-output structure. The key parameter we estimate is the sectoral trade elasticity, and we use the Simonovska and Waugh (2014) simulated method of moments estimator with micro price data. Our estimates range from 2.97 to 8.94, considerably lower than those obtained with the Eaton and Kortum (2002) price-based method. Our benchmark model is calibrated to 21 OECD countries and 20 sectors. We compute the gains from trade in our benchmark model, and in several re-calibrated versions of the model in which we eliminate one or more sources of sectoral heterogeneity. Our main result is that sectoral heterogeneity does not always lead to an increase in the gains from trade. There are two reasons for this. First, the magnitudes of our estimated sectoral trade elasticities are relatively high, while the magnitude of our estimated aggregate trade elasticity is low. All else equal, this will lead to higher gains for the aggregate, one-sector model. Second, the sectors with low trade elasticities (hence, implying high gains from trade) are not the sectors with low value-added shares and with high initial trade shares (which would magnify the gains). Hence, the sectoral heterogeneity in our calibrated model does not exert complementary gains from trade effects.

Keywords: gains from trade, estimated trade elasticities, simulated method of moments, sectoral heterogeneity, international price dispersion, multi-sector trade

JEL Classification: F10, F11, F14, F17

Suggested Citation

Yilmazkuday, Hakan and Yi, Kei-Mu and Giri, Rahul, Gains from Trade: Does Sectoral Heterogeneity Matter? (2018-03-07). Globalization and Monetary Policy Institute Working Paper No. 341. Available at SSRN: https://ssrn.com/abstract=3196453 or http://dx.doi.org/10.24149/gwp341

Hakan Yilmazkuday

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

11200 SW 8th Street
Miami, FL 33199
United States

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

Kei-Mu Yi

University of Houston - Department of Economics

Houston, TX 77204-5882
United States

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Rahul Giri (Contact Author)

Centro de Investigación (CIE), Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico

HOME PAGE: http://ciep.itam.mx/~rahul.giri/

International Monetary Fund

Kuwait

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