“Ricardian Productivity Differences and the Gains from Trade”


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.