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Specialization, Market Access and Real Income

By: Dominick Bartelme,Ting Lan,Mr. Andrei A Levchenko

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Specialization, Market Access and Real Income

By: Dominick Bartelme,Ting Lan,Mr. Andrei A Levchenko

This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.

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Page Count

78

Publisher

International Monetary Fund

Published Date

ISBN 13

9798400269370

Specialization, Market Access and Real Income

By: Dominick Bartelme,Ting Lan,Mr. Andrei A Levchenko

Write a review Read reviews Take a Quiz Solve Book Puzzle

Specialization, Market Access and Real Income

By: Dominick Bartelme,Ting Lan,Mr. Andrei A Levchenko

This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.

Average ratings

N/A

5

0%

4

0%

3

0%

2

0%

1

0%

Solve jigsaw puzzle

Age

Page Count

78

Publisher

International Monetary Fund

Published Date

ISBN 13

9798400269370