Why all the fuzz about trade?

9 Jan, 2020 at 22:21 | Posted in Economics | 5 Comments

imagesThe share of US expenditure on imports is smaller than in most other countries. To a large extent, this reflects the fact that for a large country like the United States, a significant fraction of trade occurs intra- rather than internationally. This basic observation implies that that the welfare gains from international trade in the United States are smaller than in most other countries. Although magnitudes vary greatly depending on how one infers the shape of the US demand for foreign factor services, the estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Though such gains are nothing to spit at—they are an order of magnitude larger than the estimated gains from eliminating business cycle fluctuations—they may appear surprisingly small to some.

Arnaud Costinot & Andrés Rodríguez-Clare

And then we haven’t even started talking about the asymmetric distribution of pains and gains of international trade …


  1. I would be interested in reading your take on this topic.

    • I’ll be back on this, but in the meantime, I would recommend Duflo’s & Banerjee’s “Good Economics for Hard Times”, where you (in chapter 3) find a take similar to mine 🙂

  2. I read an interesting article by Greg Mankiw in the New York Times that quantified the gains from trade as a percentage of GDP. Here is the relevant quote:

    “After analyzing the data, Mr. Frankel and Mr. Romer concluded that “a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.” In other words, nations should take the theories of Smith, Ricardo and Melitz seriously.”

    Full article: https://www.nytimes.com/2018/02/16/business/trump-economists-trade-tariffs.html

  3. Emerging markets get far more dollars through financial trading than from real goods trading.
    See Graph 1 in https://www.bis.org/publ/qtrpdf/r_qt1512e.htm
    Debt securities to non-bank Chinese firms reached $1 trillion in 2016, while real goods trade was around half that. If you include cross-border bank trades, financial markets result in far more dollars flowing to China than real goods contribute.

    • Another BIS article https://www.bis.org/publ/qtrpdf/r_qt1012x.htm :
      “Overall, looking at developments since 1992, it is clear that FX turnover has increased more than underlying economic activity, whether measured by GDP, equity turnover or gross trade flows.”
      Financial markets are the dog; the real economy is the tail.

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