We incorporate trade imbalances into a quantitative model of bilateral trade in manufactures, dividing the world into forty countries. Fitting the model to 2004 data on GDP and bilateral trade we calculate how relative wages, real wages, and welfare would differ in a counterfactual world with all current accounts balancing. Our results indicate that closing the current accounts requires modest changes in relative wages. The country with the largest deficit (the United States) needs its wage to fall by around 10 percent relative to the country with the largest surplus (Japan). But the prevalence of nontraded goods means that the real wage in Japan barely rises while the U.S. real wage falls by less than 1 percent. The geographic barriers implied by the current pattern of trade are sufficiently asymmetric that large bilateral deficits remain even after current accounts balance. The U.S. manufacturing trade deficit with China falls to $65 billion from its 2004 level of $167 billion.
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13035.
Length: Date of creation: Apr 2007 Date of revision: Handle: RePEc:nbr:nberwo:13035
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Article
Robert Dekle & Jonathan Eaton & Samuel Kortum, 2007.
"Unbalanced Trade,"
American Economic Review,
American Economic Association, vol. 97(2), pages 351-355, May.
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Find related papers by JEL classification: F17 - International Economics - - Trade - - - Trade Forecasting and Simulation F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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Finicelli, Andrea & Pagano, Patrizio & Sbracia, Massimo, 2009.
"Ricardian selection,"
MPRA Paper
16950, University Library of Munich, Germany.
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