Measuring the Unequal Gains from Trade *

Abstract

Individuals that consume different baskets of goods are differentially affected by relative price changes caused by international trade. We develop a methodology to measure the unequal gains from trade across consumers within countries. The approach requires data on aggregate expenditures and parameters estimated from a nonhomothetic gravity equation. We find that trade typically favors the poor, who concentrate spending in more traded sectors.

Income Taxation and the Diversity of Consumer Goods: A Political Economy Approach*

“… This diversity (or quantity) effect complements the price effect usually identified in the trade literature (Feenstra and Romalis, ), which concludes that trade benefits more the relatively poor consumers (Fajgelbaum and Khandelwal, ). However, this literature only considers the effect of trade on relative prices, whereas we focus here on an expansion in the number of varieties.…”

“…These findings call for further research, notably to improve our understanding of the effect of trade on consumption. It would be worthwhile to disentangle the diversity effect (highlighted in this paper) from the price effect analyzed in the trade literature (Fajgelbaum and Khandelwal, ). From a theoretical point of view, it might also be useful to challenge our findings in the case of vertical differentiation.…”

The EU single market: the value of membership versus access to the UK

“…Fajgelbaum and Khandelwal (2016) present evidence that trade reduces inequality through disproportionally reducing the cost of living for poorer individuals. In particular, they model the consumer price impacts of and responses to recent trade flows compared with a hypothetical world without any trade.…”

The Role of Technological Change in Income Inequality in the United States

“…Although cheap imports have outcompeted some of the American producers, for U.S. consumers they translate into increased purchase power and wider consumer choice. According to Fajgelbaum and Khandelwal (2016), due to the distributional effects of trade median income, households are gaining more than 25% of their purchasing power from U.S. trade, while for the lowest third of the income distribution, about 50% of their purchase power is a result of U.S. trade. Ebenstein et al (2014) estimate that the U.S. opening up to imports from lowwage countries in the 1980s has contributed to the loss of approximately 6 million jobs and increased income inequality.…”