James Anderson, Yoto Yotov, 20 December 2020

The gravity equation of international trade raises several empirical puzzles relating to the decreasing impact of distance, the declining trade-related costs of bilateral trade, and the estimation of trade elasticities. This column introduces a new, ‘short-run gravity’ model which simultaneously resolves all three of the above-mentioned puzzles. The model estimates a 14% decline in the distance elasticity and shows that capacity reallocation raised world manufacturing trade by 75% between 1998 and 2006. Finally, an estimated structural parameter implies that the short-tun trade elasticity is about one-fourth of its long-run counterpart. 

Justin Caron, Thibault Fally, James Markusen, 11 April 2020

Economists typically look to production and trade in order to explain various empirical phenomena. However, recent research has emphasised the role of demand in understanding several remaining empirical puzzles. This column discusses the implications of demand for the skill-premium puzzle. Goods and services with high income elasticities of demand are systematically skilled-labour intensive in production. Simulations then show that neutral productivity growth and/or falling trade costs increase the skill premium for virtually all countries. These results are particularly important for understanding why skill premia have increased in most developing countries, contrary to predictions from standard trade models. 

Lorenzo Caliendo, Luca David Opromolla, Fernando Parro, Alessandro Sforza, 10 October 2017

The effects of international trade and of international migration have been central to the recent debate on economic integration. Evaluating trade and migration policies is challenging, however, because they often take place at the same time and reinforce each other, making it hard to distinguish their effects. This column uses a general equilibrium approach to quantify the effects of the 2004 EU enlargement. It finds that all EU countries gained from enlargement, but that the largest winners were the new member states, and in particular their low-skilled workers.

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