TRADE: The Quantitative New Trade Model: Equilibrium and Welfare Analysis; Professor Konstantin Kucheryavyy (University of Tokyo)

Abstract

This paper examines the equilibrium and welfare implications of quantitative trade models with sector-level external economies of scale (EES). Despite ample evidence supporting the importance of EES, and their natural emergence from new trade theories, previous studies have only studied their implications in gravity models without input-output loops. As a result, these studies fail to capture the importance of intermediate goods trade, a critical aspect of trade data. For the case of a small-open economy, we derive an intuitive condition for equilibrium uniqueness that combines trade and scale elasticities with input-output coefficients. If EES are solely a function of employment, then this condition also guarantees positive gains from trade. However, if there are EES in the use of intermediates (as implied by new trade theories), then losses from trade may occur even if the condition for uniqueness holds. More generally, countries that specialize in sectors with strong EES upstream will gain more from trade, although the presence of EES in the use of intermediates implies that one must also take into account how sectors' distortion centrality affects the previous results. We provide an intuitive expression for the gains from trade thanks to a first-order approximation around autarky, and use this expression to quantitatively understand how sector-level trade elasticities, scale elasticities, and distortion centrality measures affect the link between a country's trade pattern and its gains from trade.