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Federal Reserve Bank of Cleveland
Working Papers
On the Heterogeneous Welfare Gains and Losses from Trade
Daniel R. Carroll
Sewon Hur
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.


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Daniel R. Carroll & Sewon Hur, On the Heterogeneous Welfare Gains and Losses from Trade, Federal Reserve Bank of Cleveland, Working Papers 190601, 19 Jul 2019.
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Note: Revision of a WP 1906 originally published in March of 2019.
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Keywords: trade gains; inequality; consumption
DOI: 10.26509/frbc-wp-201906r
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