New Trade Models, Same Old Gains?

Micro-level data have had a profound influence on research in international trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. In this paper we investigate to what extent answers to new micro-level questions have affected answers to an old and central question in the field: how large are the welfare gains from trade? A crude summary of our results is: "So far, not much." (JEL F11, F12)

Trade, Di¤usion and the Gains from Openness

Building on Eaton and Kortum’s (2002) model of Ricardian trade, Alvarez and Lucas (2005) calculate that a small country representing 1 % of the world’s GDP experiences a gain of 41 % as it goes from autarky to frictionless trade with the rest of the world. But the gains from openness, which includes not only trade but all the other ways through which countries interact, are arguably much higher than the gains from trade. This paper presents and then calibrates a model where countries interact through trade and di¤usion of ideas, and then quanti…es the overall gains from openness and the contribution of trade to these gains. Having the model match the trade data (i.e., the gravity equation) and the observed growth rate is critical for this quanti…cation to be reasonable. It is shown that for this match it is necessary to introduce di¤usion and/or knowledge spillovers to the basic model of trade and growth in Eaton and Kortum (2001). The main result of the paper is that, compared to the model without di¤usion, the gains from trade are smaller whereas the gains from openness are much larger when di¤usion is included in the model