Essays in Ricardian trade theory

Abstract

We build a general Ricardian model of international trade, which extends Eaton and Kortum (2002), in order to analyze the sources of the gains from trade, the e¤ects of trade openness on productivity, and the role of nominal exchange rates. For general distributions of industry e¢ ciencies, welfare gains can always be de- composed into a selection and a reallocation e¤ect. The former is the change in average e¢ ciency due to the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries in domestic production, due the reallocation of workers away from non-exporting industries. This decomposition, which is hard to calculate in the general case, simpli es dramatically with Fréchet- distributed e¢ ciencies, providing easy-to-quantify model-based measures of these two e¤ects. For an average of 46 countries in 2000 and 2005, the selection e¤ect turns out to be somewhat more important than the reallocation e¤ect. By analyzing the relationship between trade openness and total factor produc- tivity (TFP), we propose a novel methodology to measure the latter. The logic of our approach is to use a structural model and measure TFP not from its "primitive" (the aggregate production function), but from its observed implications. We estimate TFP levels of the manufacturing sector of 19 OECD countries, relative to the United States, in 1985-2002, as the average productivity a proxy for aggregate TFP that best ts data on trade, production and wages. Our measures turn out to be easy to compute and are no longer mere residuals. To examine the role exchange rates in a model of real consumption and produc- tion decisions with no money, we follow an insight of Keynes (1931) and replicate a currency depreciation with an increase in import barriers and a symmetric decline in export barriers. By mimicking changes in exchange rates with changes in the model parameters, we can demonstrate a series of classical results and conjectures, in a very general framework with many countries, tradeable goods and non-tradeable goods. We show not only that a depreciation has no real e¤ects with exible wages, but, with sticky wages, we are able to prove that an undervalued currency causes involuntary unemployment abroad, while at home it determines ine¢ ciently high employment in the export sector, raising real GDP but lowering welfare. If the currency is overvalued, we also show that there exists an appropriate depreciation that restores competitive prices, with welfare-enhancing e¤ects, proving Friedman s conjecture (1953).