MIT14_03F10_lec12

MIT14_03F10_lec12 - Lecture Note 12 The Gains from...

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Unformatted text preview: Lecture Note 12 The Gains from International Trade: Aggregate Evidence and Distributional Consequences David Autor, MIT Department of Economics 14.03/14.003 Microeconomic Theory and Public Policy, Fall 2010 Revised 11/3/2010 1 1 Measuring the Gains from Trade: Feyrer, 2009 Theory clearly predicts that trade increases national income that is, the bundle of goods and services a country can purchase. But this is a di cult hypothesis to test in practice because its hard to conduct an experiment. We cannot readily manipulate the trade Fows of various countries to study the impact this has on their national incomes. igure 5 of eyrer (2009) shows that countries that experienced rising trade between 1960 and 1995 also experience rising GDP. Is this relationship causal? Thinking back to our causal framework, we would like to measure the causal eect of trade as follows: j = Y j T Y j A , where Y is some measure of well-being (lets say income per capita), j is the causal eect of trade on Y in country j (where stands for Gain from trade), and the superscripts A and T signify Autarky and Trade. As always, the undamental Problem of Causal Inference says that we can never directly observe j , that is, we cannot observe income per capita for country j both under both Autarky and free trade simultaneously . One standard solution would be to contrast incomes of trading and non-trading countries. We could form = E Y T | T = 1 E Y A | T = 0 , where T { , 1 } denotes whether or not a country is open to free trade. But for to be an unbiased estimate of , the following must be true: E Y T | T = 1 = E Y T | T = 0 , E Y A | T = 1 = E Y A | T = 0 . That is, the Autarkic economies would have the same income per capita as the trading countries if they opened to trade, and vice-versa for the trading countries if they became Autarkic. 2 Are these assumptions plausible? Probably not. The extent to which a country trades is an endogenous outcome that is very likely to be correlated with other factors that directly aFect income per capita. Countries that are rich for other reasons might trade more because they can aFord to import more goods from overseas. Countries that pursue sound economic policies (i.e., that raise income) may also choose to pursue trade (another sound economic policy). Countries that are rich in natural resources may trade because there is high world demand for their goods. But it may be their rich endowments that account for their wealth, not trade per se . One should therefore be very skeptical of any causal inferencethat stems from a naive comparison of the incomes of trading and non-trading countries. (In point of fact, coun- tries that trade more are on average wealthier, but this correlation need not be causal.) 2 Using the method of Instrumental Variables (IV) to measure causal eFects 2.1 The basic idea What is needed...
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MIT14_03F10_lec12 - Lecture Note 12 The Gains from...

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