On the Heterogeneous Welfare Gains and Losses from Trade
43 Pages Posted: 23 Mar 2019 Last revised: 10 Oct 2019
Date Written: July 18, 2019
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: Suggested Citation