Trade with Correlation∗ Nelson Lind Natalia Ramondo Emory University
UCSD and NBER
November 17, 2017
Abstract We develop a theory of trade that allows for arbitrary patterns of correlation in technology between countries. Our framework captures a key insight of Ricardo that is absent in the canonical Ricardian trade model—a country gains the most from trading with those countries that are technologically dissimilar. We show that calculating the gains from trade in the presence of heterogenous correlation entails a simple correction to the gains associated with CES demand systems. The theory relates the macro substitutability patterns implied by observable trade flows to different underlying micro-structures. This result provides guidance on incorporating micro estimates into macro counterfactual exercises. We apply our framework to a multi-sector model of trade, and estimate that countries specialized in sectors with low cross-country correlation have 40 percent higher gains from trade relative to countries specialized in high correlation sectors. JEL Codes: F1. Key Words: international trade; generalized extreme value; Fréchet distribution; gains from trade; gravity. ∗
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28 Nov 2017 - (2012), Costinot and Rodr`ıguez-Clare (2014), Caliendo and ... Caron et al. (2014), Lashkari and Mestieri (2016), Brooks and Pujolas. (2017) .... USA. JPN. BRA. â20. â10. 0. 10. 20. 30. 40. Percent Difference in Gains From Trade .6
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