Unbalanced Trade

29 Pages Posted: 18 Apr 2007 Last revised: 15 Aug 2010

See all articles by Robert Dekle

Robert Dekle

University of Southern California - Department of Economics

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Samuel S. Kortum

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

Date Written: April 2007

Abstract

We incorporate trade imbalances into a quantitative model of bilateral trade in manufactures, dividing the world into forty countries. Fitting the model to 2004 data on GDP and bilateral trade we calculate how relative wages, real wages, and welfare would differ in a counterfactual world with all current accounts balancing. Our results indicate that closing the current accounts requires modest changes in relative wages. The country with the largest deficit (the United States) needs its wage to fall by around 10 percent relative to the country with the largest surplus (Japan). But the prevalence of nontraded goods means that the real wage in Japan barely rises while the U.S. real wage falls by less than 1 percent. The geographic barriers implied by the current pattern of trade are sufficiently asymmetric that large bilateral deficits remain even after current accounts balance. The U.S. manufacturing trade deficit with China falls to $65 billion from its 2004 level of $167 billion.

Suggested Citation

Dekle, Robert and Eaton, Jonathan and Kortum, Samuel S., Unbalanced Trade (April 2007). NBER Working Paper No. w13035. Available at SSRN: https://ssrn.com/abstract=980425

Robert Dekle

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
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213-740-8335 (Phone)

Jonathan Eaton (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-8951 (Phone)
212-995-3932 (Fax)

HOME PAGE: http://www.econ.nyu.edu/user/eatonj/

National Bureau of Economic Research (NBER)

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Samuel S. Kortum

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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