Specialization, Market Access and Real Income

By Dominick Bartelme, Ting Lan, Andrei A Levchenko

March 8, 2024

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Dominick Bartelme, Ting Lan, and Andrei A Levchenko. Specialization, Market Access and Real Income, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates.

Subject: Export subsidies, Exports, Income, International trade, National accounts, Trade balance

Keywords: East Asia, Export subsidies, Exports, Gravity, IMF working paper 24/51, Income, Investment sales share, K-means clustering, Open economy, Real income, Trade balance, Trade specialization, YYYY International Monetary Fund

Publication Details

Pages:

78
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/051
Stock No:

WPIEA2024051
ISBN:

9798400269370
ISSN:

1018-5941

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