Gains from Trade and the Food Problem

Abstract

This paper finds that the food problem can lead to large gains from lowering trade costs for poor countries. To quantify these potential gains from trade, I extend the Eaton-Kortum trade model to include a tradable agriculture sector, minimum consumption and home production technology of agricultural goods. For a sample of 46 countries, the model is calibrated to observed bilateral trade flows, sectoral employment shares, and relative real GDP per capita. Counterfactual exercises produce three key findings. First, in frictionless trade, the average increase in real GDP per capita is more than 330% for countries in the highest quartile of agricultural employment shares, while it is 70% for countries in the lowest quartile. Second, for poor countries with the food problem, reducing trade costs on agricultural goods is particularly important for increasing their income levels: a 20% reduction on agricultural trade costs leads to 10% average increase in real GDP per capita, while lowering agricultural trade costs to those of manufacturing leads to 22% average increase in real income. Finally, poor countries' potential gains from trade can be underestimated by as much as 50% in a model without subsistence needs and home production.