On the Heterogeneous Welfare Gains and Losses from Trade

43 Pages Posted: 23 Mar 2019 Last revised: 10 Oct 2019

See all articles by Daniel Carroll

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Sewon Hur

Federal Reserve Bank of Dallas

Date Written: July 18, 2019

Abstract

How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.

Keywords: trade gains, inequality, consumption

JEL Classification: E21, F10, F13, F62

Suggested Citation

Carroll, Daniel and Hur, Sewon, On the Heterogeneous Welfare Gains and Losses from Trade (July 18, 2019). FRB of Cleveland Working Paper No. 19-06R, Available at SSRN: https://ssrn.com/abstract=3358630

Daniel Carroll

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

East 6th & Superior
Cleveland, OH 44101-1387
United States

Sewon Hur (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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