Gains from trade

Arkolakis, Costinot and Rodriguez-Clare (2012) showed that across a large class of trade models, the welfare gain from trade relative to autarky depends on just two numbers: the share of a country's spending that stays on home-made goods (lambda) and the trade elasticity (epsilon). The gain is 1 minus lambda to the power 1/epsilon. A country that buys little from abroad has lambda near one and gains little from trade; a very open economy has a low lambda and gains more. Here lambda is built from Penn World Table national accounts and epsilon is set to the literature benchmark of 5, with a sensitivity band.

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