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TOPIC:
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INPUT-OUTPUT STRUCTURE AND TRADE ELASTICITY
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ABSTRACT
This paper studies how disaggregated input-output interactions shape trade and welfare responses to changes in trade costs. I consider a model with a large number of products linked through a general "snakes and spiders" network. The central feature of the model which also makes it highly intractable is endogenous formation of comparative advantage. To overcome this complexity challenge, I obtain a perturbation solution in terms of intuitive summary statistics. I find that, in contrast to the composite intermediate good structure often employed in the literature, imperfect supplier diversification transforms fundamental comparative advantage in two ways. First, as exogenous productivity differences accumulate along supply chains, endogenous variation in relative costs is increasing in the level of trade frictions. Second, the comparative advantage of upstream and downstream industries becomes positively correlated. The first effect generates larger welfare gains from trade and also raises the average product-level import share. The second effect, however, is trade-reducing: the tendency of comparative-advantage industries to source disproportionately from each other increases aggregate home bias. Such comparative advantage spillovers are relatively strong for moderate trade costs, dominating the average import share effect, but decay fast closer to autarky. As a result, the elasticity of trade is generally non-monotone in the level of trade costs.
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PRESENTER
Mark Razhev
University of Melbourne
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RESEARCH FIELDS
International Trade Theory
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DATE:
6 March 2019 (Wednesday)
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TIME:
4pm - 5.30pm
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VENUE:
Meeting Room 5.1, Level 5
School of Economics
Singapore Management University
90 Stamford Road
Singapore 178903
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