Spatial Correlation, Trade, and Inequality: Evidence from the Global Climate
80 Pages Posted: 13 Feb 2019
Date Written: February 12, 2019
This paper shows that greater global spatial correlation of productivities can increase cross-country welfare dispersion by increasing the correlation between a country’s productivity and its gains from trade. We causally validate this general-equilibrium prediction using a global climatic phenomenon as a natural experiment. We find that gains from trade in cereals over the last half-century were larger for more productive countries and smaller for less productive countries when cereal productivity was more spatially correlated. Incorporating this general-equilibrium effect into a projection of climate-change impacts raises projected international inequality, with higher welfare losses across most of Africa.
Keywords: gains from trade, spatial correlation, inequality, climate change, El Ni~no, agricultural trade
JEL Classification: F11, F14, F18, O13, Q17, Q54, Q56
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