Can vertical specialization explain the growth of world trade?No 96, Staff Reports from Federal Reserve Bank of New York Abstract: The growth in the trade share of output is one of the most important features of the world economy since World War II. The growth is generally thought to have been generated by falling tariff barriers worldwide. This thinking, however, does not square with standard static and dynamic international trade models. Because tariff barriers have decreased little since the early 1960s, these models cannot explain the growth of trade without assuming counterfactually large elasticities of substitution between domestic and foreign goods. I show that this growth can be reconciled with the relatively small declines in tariffs once vertical specialization is included in the models. Vertical specialization, which occurs when countries specialize only in particular stages of a good's production sequence, magnifies the trade growth effects of trade barrier reduction. To show this, I calibrate and simulate a dynamic Ricardian model of trade with vertical specialization. I show that this model can explain about 70 percent of the growth of trade with just a unitary elasticity of substitution. The model also has important implications for the gains from trade. Keywords: International trade; Tariff (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:96 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.