Measured Aggregate Gains from International Trade

Do theoretical welfare gains from trade translate into aggregate measures of economic activity? We calculate the changes in real GDP and real consumption that result from changes in trade costs in a range of workhorse trade models, following the procedures outlined by statistical agencies in the United States. Our main findings are as follows: First, real GDP and measured aggregate productivity rise in response to reductions in variable trade costs if GDP deflators capture the decline in trade costs. Second, with balanced trade in each country, changes in world real consumption and changes in world real GDP (i.e.: weighting the change in each country by its nominal GDP) in response to changes in variable trade costs coincide, up to a first-order approximation, with changes in world theoretical (welfare-based) consumption. The equivalence between measured consumption and theoretical consumption holds country-by-country under stronger conditions. Third, for given trade shares and changes in variable trade costs, changes in real GDP and changes in world real consumption are approximately equal in magnitude across the models we consider.

Substitution between foreign capital in China, India, the Rest of the world, and Latin America : much ado about nothing ?

This paper explores the impact of the emergence of China and India on foreign capital stocks in other economies. Using bilateral data from 1990-2003 and drawing from the knowledge-capital model of the multinational enterprises to control for fundamental determinants of foreign capital stocks across countries, the evidence suggests that the impact of foreign capital in China and India on other countries'foreign capital stocks has been positive. This finding is robust to the use of ordinary least squares, Poisson, and negative binomial estimators; to the inclusion of time and country-pair fixed effects; to the inclusion of natural-resource endowments; and to the use of the sum of foreign capital stocks in Hong Kong (China) and mainland China instead of using only the latter's foreign capital stocks. There is surprisingly weak evidence of substitution in manufacturing foreign capital stocks away from Central America and Mexico in favor of China, and from the Southern Cone countries to India, but these findings are not robust to the use of alternative estimation techniques.E-Business,Foreign Direct Investment,Economic Theory&Research,Debt Markets,Currencies and Exchange Rates

Foreign direct investment in Latin America during the emergence of China and India : stylized facts

In spite of the growing concerns about foreign direct investment being diverted from Latin America to China and India, the best available data show that Latin America has performed relatively well since 1997. Foreign capital stocks from OECD countries and the United States in particular in China and India are still far from those in the largest Latin American economies. The evidence shows that foreign capital stocks in China increased more than in Latin America during 1990-1997, but not as much since 1997. In fact, Latin America has actually performed better than China since 1997 given its lack of relative growth. The growth of foreign capital stocks in India was more stable than in China. Nonetheless, after controlling for shocks emanating from the source countries and bilateral distance between source and host countries, this paper finds a significant change in foreign capital stocks relative to China between 1990 and 1997, but no change relative to India.Debt Markets,Transport and Trade Logistics,Common Carriers Industry,,Corporate Law

Importing Skill-Biased Technology

Capital equipment – such as computers and industrial machinery – embodies skill-biased technology, in the sense that it is complementary to skilled labor. Most countries import a large share of their capital equipment, and by doing so import skill-biased technology. In this paper we develop a tractable quantitative model of international trade in capital goods to quantify the extent to which trade, through capital-skill complementarity, raises the relative demand for skill and hence increases the skill premium. In one counterfactual, we find that moving from the trade levels observed in the year 2000 to autarky would decrease the skill premium by 16% in the median country in our sample, by 5% in the US, and by a much larger magnitude in countries that heavily rely on imported capital equipment.

Essays on International Economics

In these essays, I examine quantitatively some of the classic questions in the field of International Economics: What is the impact of international trade on consumption and productivity? How does international trade affect income inequality? How do exchange rates movements affect real output and productivity? This dissertation is composed of three chapters, each covering one of these topics.The first chapter, based on my paper "Measured Gains from International Trade" with Ariel Burstein, revisits the measurement of welfare gains from trade liberalizations. Economists so far have measured these gains using one of two alternative approaches. A first approach uses structural models to infer unobservable welfare gains from changes in trade costs or in trade patterns. A second approach documents the empirical link between the level or the change in international trade and aggregate indicators of economic activity. This chapter connects these two approaches by studying the relationship between the theoretical welfare gains from trade and observable aggregate measures of economic activity, such as real GDP and real consumption, as constructed by national statistical agencies. Across a wide range of models, we find that measured real GDP and productivity rise in response to reductions in variable trade costs if GDP deflators capture the decline in trade costs. On the other hand, welfare gains from tariffs reductions are only reflected on real GDP if tariff revenues at constant prices rise. The second chapter analyzes the impact of capital equipment imports on income inequality across 53 countries. The chapter is based on my paper "Importing Skill Biased Technology" with Ariel Burstein and Jonathan Vogel. Capital equipment, such as computers and industrial machinery, is mostly operated by skilled workers and generally takes on routine tasks that are otherwise performed by unskilled workers. When a country imports capital equipment, it raises the relative demand of skilled versus unskilled workers, increasing income inequality. The chapter develops a tractable model of international trade in capital goods to quantify these effects. In doing so, it provides sufficient statistics and transparent formulas that will enable development practitioners to independently assess how trade in capital goods affects income inequality. We estimate that imports of equipment account for 16 percent of the income gap between skilled and unskilled workers in the median country in our sample, and for a much larger magnitude in economies that heavily rely on imported capital equipment. We also show that imports of capital equipment are essential to increase productivity and income in developing countries, both for skilled and unskilled workers, although my findings suggest these imports will disproportionately benefit the skilled segment of the population. In the third chapter, "Exchange Rates, Aggregate Productivity and the Currency of Invoicing of International Trade", I use a novel dataset on prices and quantities from Chilean customs and a model of international prices with nominal rigidities to study how movements in nominal exchange rates can impact aggregate output and productivity. Empirically, I show that export prices are rigid in the currency in which exports are invoiced, so the relative price of firms invoicing in different currencies fluctuates with the exchange rate. I exploit this feature of the data to estimate how quantities of firms invoicing in different currencies selling in a common destination move with the exchange rate. I find this elasticity to be low, indicating that exchange rate movements have limited expenditure switching effects. I then ask how the observed variation in markups generated by exchange rate movements affects aggregate productivity by affecting the allocation of production across firms. Guided by a quantitative open economy model disciplined by some features of my data, I show that a 10 percent change in the exchange rate changes productivity in the tradable sector by 0.5 percent. Alternative parameterizations that do not account for the observed heterogeneity in invoicing predict changes in productivity at least five times smaller. This implies that taking heterogeneity into account is key for understanding the quantitative effects of exchange rates on productivity

Replication data for: "Real Exchange Rates, Income Per Capita, and Sectoral Input Shares"

Review of Economics and Statistics: Forthcomin

Substitution between foreign capital in China, India, the rest of the world and Latin America: much ado about nothing?

This paper explores the impact of the emergence of China and India on Foreign Capital Stocks (FCS) in other economies. Using bilateral FCS data from 1990-2003 and drawing from the Knowledge-Capital Model of multinational enterprises to control for fundamental determinants of FCS across countries, the evidence suggests that the impact of foreign capital in China and India on other countries' FCS has been positive. This finding is robust across different specifications and estimation techniques. There is surprisingly weak evidence of substitution in manufacturing FCS away from Central America/Mexico in favor of China, and from Southern Cone countries to India, but these findings are not robust to the use of alternative estimation techniques. In sum, fears of a global competition for FDI seem misplaced, and policymakers concerned about attracting foreign investors should focus their efforts on the fundamentals determinants of FDI.• JEL Classification: F21, F22, O57</jats:p