Gains from Trade and the Sovereign Bond Market

Abstract

Increasing international flows of goods, services, and financial assets have been shown to increase a country's welfare through various channels. This paper studies the interaction between a country's welfare gains from international trade and its sovereign's access to bond markets. We do so by incorporating a sovereign bond market into a simple Armington (1969)'s trade model. While standard trade models suggest surprisingly small gains from trade, our model implies that introducing channels through a sovereign bond market greatly magnifies the gains from trade.

Alternative Sources of the Gains from International Trade: Variety, Creative Destruction, and Markups

“…Moving from free trade to a hypothetical 40 percent worldwide tariff, they find average country losses of 7.0 percent with heterogeneous firms as compared to 5.3 percent with homogeneous firms; but in a model without intermediate inputs, the loss due to the tariff with heterogeneous firms is slightly smaller than with homogeneous firms. 7 We conclude that while there is a presumption that the gains from creative destruction exceed the gains from new varieties, this result does not always hold in calibrated models. The same is true when we consider results from actual changes in trade barriers.…”

“…This model does not include any increasing returns to scale or monopolistic competition, so as explained by Simonovska and Waugh (2014), it gives low gains from trade. 7 As noted by Costinot and Rodríguez-Clare (2014, p. 233), tariffs can lead to changes in product variety in a multisector Melitz-Chaney model. For this reason the comparison of the heterogeneous and homogeneous firm models is not a pure comparison of creative destruction versus product variety gains.…”