Working Paper

On the Heterogeneous Welfare Gains and Losses from Trade

Abstract: 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; consumption; inequality;

JEL Classification: E21; F10; F13; F62;

https://doi.org/10.26509/frbc-wp-201906r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2019-07-19

Number: 19-06R

Note: Revision of a WP 1906 originally published in March of 2019.