Gains from trade and measured total factor productivity

We develop and calibrate a model where differences in factor endowments lead countries to trade different goods, so that the existence of international trade changes the sectorial composition of output from one country to another. Gains from trade reflect in total factor productivity. We perform a development decomposition, to assess the impact of trade — and barriers to trade — on measured TFP. In our sample, the median size of that effect is about 6.5% of output, with a mean of 17% and a maximum of 89%. Also, the model predicts that changes in the terms of trade cause a change of productivity, and that effect has an average elasticity of 0.73.

Measure effect of trade on TFP using a model with trade in intermediate goods.
► Trade leads to more efficient allocation of resources across sectors, boosting TFP.
► Assessed gains from trade for some poor nations range between 50% to 100% of TFP.
► TFP disparity is larger than that obtained from closed-economy output decomposition.
► Gains in TFP increase with trade liberalization and improvements in terms of trade.