General Equilibrium Analysis of the Eaton-Kortum Model of International Trade

74 Pages Posted: 8 Feb 2006 Last revised: 25 Aug 2010

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Robert E. Lucas

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2005

Abstract

We study a variation of the Eaton-Kortum model, a competitive, constant-returns-to-scale multicountry Ricardian model of trade. We establish existence and uniqueness of an equilibrium with balanced trade where each country imposes an import tariff. We analyze the determinants of the cross-country distribution of trade volumes, such as size, tariffs and distance, and compare a calibrated version of the model with data for the largest 60 economies. We use the calibrated model to estimate the gains of a world-wide trade elimination of tariffs, using the theory to explain the magnitude of the gains as well as the differential effect arising from cross-country differences in pre-liberalization of tariffs levels and country size.

Suggested Citation

Alvarez, Fernando and Lucas, Robert E., General Equilibrium Analysis of the Eaton-Kortum Model of International Trade (November 2005). NBER Working Paper No. w11764. Available at SSRN: https://ssrn.com/abstract=847036

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
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773-702-4412 (Phone)
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National Bureau of Economic Research (NBER)

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Robert E. Lucas

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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