International Trade: Lecture 4

Transcription

1 International Trade: Lecture 4 Alexander Tarasov Higher School of Economics Fall 2016 Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

2 Motivation Chapter 4 (by Costinot and Rodriguez-Clare) in Handbook of International Economics Volume 4, Pages (2014) Edited by Gita Gopinath, Elhanan Helpman and Kenneth Rogoff There are gains from international trade. What is the magnitude of these gains? Can we put numbers on the theory works? The macro-level structural approach to measure the gains from trade: there are a number of models of trade (the Ricardian model, the H-O model, the Krugman and Melitz models) while different on the micro-level, they share the same macro-level predictions regarding the structure of bilateral trade flows as a function of bilateral trade costs! Using this structure, we will try to understand the size of changes in welfare under trade. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

3 Motivation and Approach The main goal is to use theory in order to derive numbers: explore whether particular economic forces appear to be large or small in the data rather than pure qualitative insights! To do so, we need a richer framework (not just two countries)! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

4 Some Notation We will use the following notation: we consider the CES utility with the elasticity of substitution σ > 1, the utility level in country j is C j N countries (the real world), X ij is the nominal value of imports of j from i total income (GDP): Y j = N i=1 X ij iceberg trade costs: τ ij > 1, τ ii = 1. The trade elasticity: ε = ln ( X ij /X jj ) ln τ ij > 0, the elasticity of imports relative to domestic demand. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

5 The Experiment Let us assume that trade costs changed from {τ ij } to due to trade liberalization or imposing additional trade barriers) { } τ ij (for instance, How can we find the corresponding change in welfare (real income)? Our welfare is C j = Y j /P j (see the problem set 3) It is possible to show that C j C j Ĉ j = ( ˆλ jj ) 1/ε, where ˆλ jj λ jj λ jj = (X jj/y j ) (X jj /Y j ) The trade elasticity, ε, and the changes in the share of expenditure on domestic goods, λ jj are sufficient to infer welfare changes! Remarkable! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

6 Moving from Trade to Autarky Let us consider the following experiment: moving to autarky. Formally, we assume that variable trade costs in the new equilibrium are such that τ ij = + for any pair of countries i = j. Note that in this case the share of expenditure on domestic goods, λ jj, must be equal to 1 in the new equilibrium. Thus, ˆλ jj = 1. λ jj The gains from trade, G j : the absolute value of the percentage change in real income that would be associated with moving to autarky in country j. G j C autarky j C j C j = 1 C autarky j = 1 ( ) 1/ε ˆλ jj = 1 (λjj ) 1/ε. C j Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

7 The Trade Elasticity and the Gravity Equation That is, to get the magnitude of the gains from trade, one needs to know the share of expenditure on domestic goods in the actual equilibrium (it is available in the data) and the trade elasticity, ε! Just two statistics! How to get the value of ε? = The gravity equation! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

8 Gravity equation: Empirical findings An empirical observation (first documented by Tinbergen (1962)): trade volumes between a country pair are proportional to their sizes and inversely proportional to distance between the countries X ij = A GDPα i GDP β j d γ ij Bilateral trade rises with the size of either trading partner. Countries further apart trade less. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

9 Gravity equation: Estimation Taking the logs: log X ij = log A + α log GDP i + β log GDP j γ log d ij + ε ij Typical estimates: α, β, γ 1 The gravity model explains these patterns and fits the data on bilateral trade volumes remarkably well (R 2 is 80%)! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

10 Returning to the Gains from Trade We can consider a slightly modified empirical gravity equation: log X ij = ξ i + ζ j ε log τ ij + ε ij, where ξ i is an exporter fixed effect (includes everything related to exporter i) and ζ j is an importer fixed effect (includes everything related to exporter j). We can estimate the above equation using the data on X ij and τ ij. This allows us to get the number of ε. The commonly used value is ε = 5. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

11 Returning to the Gains from Trade Now, we know the trade elasticity and the shares of income spent on domestic goods = we can compute the gains from trade for all countries in the world. Results: the gains from trade are below 2% for three countries: Brazil (1.5%), Japan (1.7%), and the United States (1.8%). Not surprisingly, gains from trade tend to be larger for smaller countries. The largest predicted gains are for Slovakia (7.6%), Ireland (8.0%), and Hungary (8.1%). Table in the class! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

12 Gravity equation: Deriving the Gravity Equation from the Theory It appears that all theoretical models of trade lead to the gravity equation! It is a remarkable result! Let us consider the modified Krugman model. Utility: C j = ( C N i i=1 k=1 ( c ij k ) σ ) σ 1 σ 1 σ, where N i is the number of varieties in country i, c ij k is the total consumption of good k in country j, and σ > 1 is the elasticity of substitution between goods: σ 1 σ = θ. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

13 Deriving the Gravity Equation Technology is the same across all countries. Therefore, Moreover, p ij k = pij. p ij = p i τ ij where τ ij is transport costs (τ ii = 1) and p i is the "fob" price. Specifically, p i = w i σ σ 1. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

14 Deriving the Gravity Equation Consumer maximization problem: C j = ( C i=1 N i ( c ) σ σ 1 σ 1 ij) σ subject to Y j = C N i p ij c ij i=1 Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

15 Deriving the Gravity Equation Solution: c ij = Y j P σ 1 j where P j is the CES price index and given by P j = ( C i=1 1 (p ij ) σ ( ) 1 N i p ij) 1 σ 1 σ Indirect utility: C j = Y j /P j. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

16 Deriving the Gravity Equation Trade volumes: X ij = N i p ij c ij = N i Y j P σ 1 1 j (p ij ) σ pij ( ) p = N i ij 1 σ Y j Moreover, from the zero profit condition (free entry), P j Y i = N i p i ȳ, where ȳ is output per firm. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

17 Deriving the Gravity Equation Therefore, and N i = Y i p i ȳ X ij = Y i p i ȳ Y j = ( p ij P j ) 1 σ Y i Y j (P j ) σ 1 (τ ij ) σ 1 (p i ) σ ȳ In the Krugman model: ε σ 1. The macro estimate of σ is 6. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

18 Estimating the Gains from Trade: a Natural Experiment Etkes and Zimring (2015) "When trade stops: Lessons from the Gaza blockade " in the Journal of International Economics This paper studies the consequences of a rare episode in modern history, in which the Gaza Strip came close to being autarkic as a result of an Israeli and Egyptian blockade that was imposed on it between September 2007 and June An important advantage of the paper is that it uses the West Bank (which was not blockade) as a natural counterfactual economy. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

19 Estimating the Gains from Trade: a Natural Experiment At the time the blockade began, the West Bank and Gaza had similar economic and political institutions, and, importantly, both before and after the blockade on Gaza, the two regions had very similar trends in prices and consumption. Using detailed expenditure data at the household level, the authors calculate the monetary equivalent of the welfare loss caused by the blockade based on the concept of compensating variation, and using the West Bank as the counterfactual economy for Gaza. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

20 Estimating the Gains from Trade: a Natural Experiment The calculated compensating variation is not the sum of money that will make a household in blockaded Gaza as well off as it was before the blockade. BUT! The sum that will make it as well off as it would have been had it been located in the open West Bank rather than in the blockaded Gaza during these years. The average welfare loss for a household in Gaza was equal to between 14% and 27% of the value of its pre-blockade expenditure. The values according to the structural approach: between 10% and 24%. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

21 Estimating the Gains from Trade: a Natural Experiment The calculated compensating variation is not the sum of money that will make a household in blockaded Gaza as well off as it was before the blockade. BUT! The sum that will make it as well off as it would have been had it been located in the open West Bank rather than in the blockaded Gaza during these years. The average welfare loss for a household in Gaza was equal to between 14% and 27% of the value of its pre-blockade expenditure. The values according to the structural approach: between 10% and 24%. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

22 The political background of the blockade on Gaza In 1993, after 26 years of direct Israeli control, the Oslo Accord was signed. Under the terms of the agreement, the newly created Palestinian National Authority (PNA), assumed control over most civilian matters in both the West Bank and Gaza, while the Israeli authorities maintained control over security issues. This arrangement remained in force until September 2005, when the Israeli army completed a unilateral withdrawal of all military forces from the Gaza Strip, and the evacuation of about 8000 Israelis who lived in settlements there, effectively drawing a border between the Gaza Strip and Israel. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

23 The political background of the blockade on Gaza From that point, the Gaza Strip was under the complete control of the PNA, while in the West Bank, the PNA was limited to dealing only with civilian matters, as before. January 2006: internal political tensions between the religious Hamas and the secular Fatah movements resulted in a de facto division of Palestinian government into a West Bank-based Fatah government and a Gaza based Hamas government. On September 19th 2007 the Israeli government passed decision B/34, which declared the Gaza Strip a Hostile Territory, and ordered the Israeli Defense Force to impose restrictions on the movement of goods and people into and out of the Gaza Strip. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

24 The political background of the blockade on Gaza The Egyptian authorities of the time, also alarmed by the rise of Hamas to power, cooperated, and closed the land crossing between the Gaza Strip and Egypt. The beginning of the blockade can therefore be dated to September 2007, and there is no reason to believe it was anticipated. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

25 The economic background of the blockade on Gaza From the beginning of the decade until 2005, the Gaza Strip was an open economy. Imports were on average 35.6% of total expenditure between 2000 and Exports were much smaller, equal on average to about 10% of imports during those years. The large trade deficits of the Gaza Strip were funded using three sources: transfers from the West Bank, UN agencies, and from other donor countries remittances from Palestinians working abroad foreign direct investment Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

26 The economic background of the blockade on Gaza At the time the blockade was imposed, the GDP in Gaza was 1.43 billion USD, and the population was 1.35 million people. Following decision B/34, exports from Gaza were essentially eliminated and non-energy imports were greatly reduced Palestinian National Accounts: exports of goods from Gaza were 0.6 million in 2009 (52.8 million per year in ) non-energy imports decreased substantially as well Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

27 The economic background of the blockade on Gaza Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

28 The economic background of the blockade on Gaza Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

29 The economic background of the blockade on Gaza The blockade was first eased in February 2009, when Israeli authorities expanded the list of goods that were allowed to be imported into Gaza, while still banning all exports. A major change in policy came in June 2010, when diplomatic pressure led Israel to ease restrictions very substantially, though certainly not completely. There is no reason to believe that this was anticipated. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

30 The economic background of the blockade on Gaza. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

31 The economic background of the blockade on Gaza Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

32 The welfare cost of the blockade The data: the Household Expenditure Survey, which is a repeated cross-section documenting expenditure by households on several hundred items, and the micro data of the Palestinian CPI. Three measures of the welfare cost: (upper bound, the Slutsky Compensating Variation) how much money a household in blockaded Gaza needs in order to be able to purchase the same bundle it would do without the blockade (average, the Hicks Compensating Variation) how much more money a household in blockaded Gaza needs to be as well off as it would be without the blockade (lower bound, the Slutsky Equivalent Variation) the amount of money that can be taken away from a household in case of no blockade so that it will only be able to afford the consumption bundle it had during the blockade Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

33 The welfare cost of the blockade The problem: we do not know what would happen without the blockade! Solution: use the West Bank that was very similar to Gaza in a number of characteristics Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34

34 Results Alexander Tarasov (Higher School of Economics) International Trade (Lecture 4) Fall / 34