“Ricardian Productivity Differences and the Gains from Trade”

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You’ll recall that Ralph Ossa emphasized sectoral heterogeneity in trade elasticities as one reason the ACR formula might understate the gains from trade. I haven’t read it yet, but this new NBER WP by Andrei Levchenko and Jing Zhang also emphasizes the importance of sectoral heterogeneity in thinking about this topic:

[T]he simpler formulas that do not use information on sectoral trade volumes understate the true gains from trade dramatically, often by more than two-thirds. The error in the formulas across countries is strongly negatively correlated to the strength of Ricardian comparative advantage: the one-sector formula-implied gains understate the true gains from trade by more in countries with greater dispersion in sectoral productivity. The model-based exercise thus reinforces the main result of the paper that accounting for sectoral heterogeneity in productivity is essential for a reliable assessment of the gains from trade.

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